Some claim that British American Tobacco (BAT) is one of the best passive income stocks around.
Each year since 1998, the cigarette giant has increased its payout to shareholders. This means it belongs to an exclusive club of Dividend Aristocrats, stocks that have achieved at least 25 years of dividend growth.
And during its four most recent financial years, it’s managed to boost its annual payout by an average of 3.3%.
However, despite this impressive performance, it might come as a surprise to learn that there’s another FTSE 100 stock that’s done even better.
Who’s that then?
Halma (LSE:HLMA), the life-saving technology company, has increased its dividend by at least 5% a year for an incredible 45 years.
But despite this amazing track record, I don’t consider it to be an income stock.
That’s because it’s currently (8 October) yielding only 0.9% — way below the FTSE 100 average of 3.8% and, for example, that of British American Tobacco (8.7%).
Source: Halma, 2024 annual report
However, I’m not going to immediately dismiss the idea of investing.
Halma’s yield is low because its share price has grown significantly in recent years. Since October 2014, it’s more than quadrupled, which makes it sound like a growth stock to me.
And with its share price currently 22% below its all-time high achieved in December 2021, now could be a good time to consider taking a stake.
How does it grow?
Halma buys small and medium-sized businesses with a global reach, in its niche markets of safety, health and the environment.
Since 1971, it’s bought over 170 companies and claims to have another 600 in its pipeline. Through acquisitions alone, the group has a target of adding at least 5% to earnings each year.
Its most recent purchase was Rovers, a Dutch business that designs and manufactures specialist devices that help detect cervical cancer at an early stage.
For the year ended 31 March 2024 (FY24), Rovers generated a profit after tax of £3.8m on sales of £10m. Assuming all targets are met, Halma will pay £77m for the company. This is a multiple of 20.2 times earnings.
This sounds expensive for a private company but it should see an uplift in the group’s stock market valuation, even if nothing changes. That’s because for FY24, Halma reported earnings per share of 82.4p, meaning the group currently trades on a historic price-to-earnings ratio of 30.3.
Therefore, all things being equal, the acquisition of Rovers will add £115m (30.3 x £3.8m) to Halma’s market cap. With a price tag of ‘only’ £77m, shareholders could soon start to benefit.
Caution
However, as with any investment, there are risks.
We’ve seen that the shares aren’t cheap and its yield is low.
Also, its return on capital employed was 1.9 percentage points lower in FY24, than in FY14. This means it’s having to work harder just to stand still.
My verdict
But over the past 10 years it’s grown both revenue and earnings by an average of 11% a year.
And I believe the markets in which it operates — particularly healthcare and the environment — could be some of the strongest over the next decade or so.
For these reasons, I’m going to put the company on my watchlist for when I’m next in a position to invest.
The post With 45 years of 5%+ dividend growth, could this be the ultimate passive income stock? appeared first on The Motley Fool UK.
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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Halma Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
