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I love being the owner FTSE 100 stocks pay me dividends. I love it even more when those benefits increase. I love it even more if that growth continues for decades.
There is a caveat though. While I like stocks with good dividend records I want to buy ones that I think have good dividend potential – without overpaying.
UK Dividend Aristocrat
That brings me to one FTSE 100 share that has an impressive record of increasing its dividends annually, for more than half a century. That makes it what we call a Dividend Aristocrat. Not only that, but I think the business has great potential both now and in the future.
The company in question says Spirax (LSE: SPX). Many people have never heard of this member of the FTSE 100, perhaps because it is an industrial business that sells to other companies. But from a commercial perspective, I think there’s a lot to like about the business model – and what it means for profit margins.
Strong demand, proven model
Over its long life, Spirax has developed a business model that focuses on some of the specific engineering needs that customers may have. For example, although steam may seem like a technology of the past, it currently has a variety of industrial applications.
By selling and supplying equipment that can help customers realize those applications and those of various industrial fluids, Spirax has found a very profitable niche.
If a client machine goes down, the cost of business interruption can be huge. That gives Spirax pricing power. It also means that demand can be strong even during a recession.
I would happily own this share
Things can go wrong all the time. For example, one risk I see is the softening of demand in the Chinese market continuing – and possibly spreading to other markets. That could hurt revenue and profits for years to come.
But I would be happy to own the share for a long time – if I can buy it at the right price.
Not yet
Spirax’s share price has been falling. Indeed, the share is now expensive 36% less than the beginning of the year. In five years, the decline was 22%.
But does that mean it’s now a good value? That’s not the case. Spirax trades at an earnings ratio of 25. That still seems expensive to me. I don’t feel that it gives me a sufficient margin of safety as an investor, in case Spirax’s business performance turns out to be worse than I hope.
For that reason, I don’t see now the time to buy FTSE 100 shares for my portfolio.
I continue to like the business model and the profit prospects it offers. But the price for me is not attractive. So I’m going to wait and see, hoping that at some point I can buy Spirax shares at what I consider to be an attractive valuation.
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