A debt-free dividend grower: Servcorp Ltd?

Servcorp Ltd (ASX: SRV) is a multi-national business offering serviced offices in key commercial areas in important cities such as London, Paris, Brussels, New York, Dubai, Abu Dhabi and more – 151 floors across 53 cities in 22 countries. With a strong balance sheet and well aligned management, the company could be a diamond in a haystack for long-term income investors.

The company’s current Chief Executive Officer, Alfred Moufarrige, founded the company in 1978 (!). Although I am not familiar with the company’s earlier history, in recent years he has run the business conservatively, and Servcorp carries around $100 million in cash and has no debt.

Although the company’s 2.9% dividend yield is not appealing on the face of it, today’s payout ratio equates to around 55% of Net Profit After Tax, or one third of operating cash flows. This is a relatively low level compared to other companies on the ASX and provides room to absorb the shock of an economic downturn. Servcorp also has a stack of cash and no debt, improving both its growth prospects and financial resilience.

Management has forecast Profit Before Tax (their preferred measure of profitability) growth of 15% this year. If profit after tax grows at a similar rate, that would give Servcorp a Price to Earnings (P/E) ratio of around 17, which isn’t bad given its financial position and the rate at which it has been growing recently.

Occupancy remains persistently around 75%, actually a slight decrease on the previous year, although management believes this can likely be improved. With ongoing expansion into new countries, and new precincts in existing markets, Servcorp has plenty of room to continue growing, while its prime locations and global diversification offers resistance to an economic downturn.

Servcorp has a lot going for it, but I'm willing to bet a number of readers will be turned off by its 2.9% dividend.

Those looking to squeeze a little more juice out of their dividend cheques could instead check out our latest top picks, which feature:

Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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