LONDON -- Shares in Serco Group have shot higher in recent weeks after the company boosted its dividend policy and posted excellent full-year results, the stock advancing 11% in less than a month and hitting a near-three-year peak of 634 pence in the process.
And I am convinced that the diversified support services play is in line to punch fresh multi-year highs, its move into lucrative new service areas and geographies helping to provide a great outlook for strong earnings growth.
Revenues leap in 2012 on exciting new opportunities
Serco announced earlier this month that revenue from ongoing activities leapt 8.1% to 4.8 billion pounds in 2012, driving adjusted pre-tax profit 6.1% higher to 278.1 million pounds.
The company reported excellent performance from its global "business process outsourcing" arm, which posted 12% organic revenue growth last year and a 40% increase in total turnover.
And rapid expansion into exciting new territories looks set to power sales growth in coming years. Serco noted that organic growth in Asia, the Middle East, Africa, and Australia came in at 22% last year, with total revenue rising 31% from 2011. These regions now account for 18% of group turnover.
2012's performance was not completely rosy, with organic revenue in the Americas slipping 14% as a result of reduced government spending. However, a solid 19.1 billion pound order book -- up from 17.9 billion pounds in 2011 -- provides excellent earnings visibility. And I believe that the company's entry into new geographies and sectors with excellent structural growth prospects should underpin stunning growth in coming years.
Dig into exciting dividend story
City brokers expect earnings per share to edge 2% higher in 2013 to 44 pence, before picking up speed thereafter to post growth of 10% in 2014 to 48 pence. And the company currently trades on a P/E ratio of 14.4 and 13.1 for 2013 and 2014 respectively, providing a decent discount to a forward earnings multiple of 17.8 for the broader support services sector.
Particularly exciting is the group's statement during the recent update that it plans to "accelerate dividend growth on the path to a higher payout ratio" due to its confident market outlook and strong financial position. Indeed, last year's 10.1 pence payout was up 20% from 8.4 pence in 2011. And analysts the dividend to rise to 11.6 pence and 14.2 pence in 2013 and 2014 correspondingly.
These shareholder payments also wield supreme protection, with dividend cover of 3.8 times and 3.4 times for each of the next two years running well ahead of the widely regarded security benchmark of 2.
Although prospective yields stand below the current 3.2% FTSE 100 average -- yields for 2013 and 2014 are estimated at 1.8% and 2.4%, respectively -- Serco's commitment to supercharging the dividend presents a compelling case for the longer term income investor.
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