The income investor’s guide to Reece Ltd

Reece Ltd (ASX: REH) is a supplier of bathroom and plumbing products with over 570 trading outlets across Australia and New Zealand. Reece also services the landscape and agricultural supply industries in addition to its heating, ventilation, and air conditioning (HVAC) business.

Here are its key dividend metrics:

  • Dividend yield. Reece paid out a record fully franked total dividend of $1 per share in FY 2017 which equates to a dividend yield of about 3% at the old share price. The company had a 5 for 1 share split late last year hence its current share price of $9.70. This is consistent with the sector average of 2.8%.
  • Dividend payout ratio. Reece has a dividend payout ratio of 47% i.e. 47% of its FY 2017 profits were paid out as a dividend. This means that management are able to retain earnings within the business and use them to fund further growth opportunities or to increase future dividends.
  • Dividend growth rate. Since FY 2013, Reece had a dividend compounded annual growth rate (CAGR) of 12.7% which was supported by a net profit after tax CAGR of 15.4%. Reece is an efficient and profitable business with a return on assets of 12% and a return on equity of 19%.
  • Dividend stability. Reece has a dividend stability of 95.6% which is slightly higher than the sector average of 90.7%.
  • Valuation. Reece has a PE ratio of 22 which is higher than the sector average of 15 and the market average of 17. The company also has a high price to book ratio of 4 and a price to tangible book value of 5. Whilst the valuation is not cheap, it does reflect the market’s expectation of earnings growth at Reece.
  • Future prospects. Going forward, Reece will likely continue to leverage off its established market position, its scale compared to its smaller competitors and population growth driven net migration to support earnings and dividend growth. Cyclical downturns in the housing market may however slow the company’s progress.

Overall, Reece is a solid business with a good track record and could be a good business to invest in.

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Motley Fool contributor Kevin Gandiya has no position in any of the 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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