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Ah, the sweet sound of dividends hitting an account. It's music to any foolish investor's ears, isn't it? Well, fellow dividend hunters, I've stumbled upon a company with a dividend yield I like and fundamentals that make the value investor in me happy, too. CCD (LSE:DCC), a sales, marketing and distribution giant in the world of carbon energy solutions.
Miscellaneous income
Now I know what some of you are thinking. Another boring distributor? Maybe not. The company is like a Swiss Army knife of the business world. From DCC Energy, which keeps the lights on and the wheels turning, to DCC Healthcare and DCC technology, with their gadgets and gizmos galore. This diversification is its secret ingredient, one that has helped it weather many storms and economic challenges since its founding in 1976.
Let’s cut to the chase: we’re here for the dividends, right? The stock currently yields a solid 3.67%, and management has been increasing this yield fairly consistently since 2015. With a payout ratio of 60%, I think there’s still plenty of room for further increases, as projected for 2027 and beyond.
The assessment
What really interests me is valuation. Many great companies have high dividends, but they don’t always have a strong balance sheet or growth prospects that make them look sustainable. A discounted cash flow (DCF) analysis, which uses cash flows to estimate a company’s fair value, suggests it may be undervalued by as much as 48%. Obviously, it’s not a guarantee, but it tells me there’s still plenty of potential, even after a 24% price increase in the past year alone.
Analysts also seem optimistic, with an average price target 33.2% above the current share price. Looking ahead, the company is expected to grow earnings by 9.7% annually. While that's not a huge number, I like the idea of steady, sustainable growth.
As I have already pointed out, a fat dividend is of no use if the company cannot continue to pay it. Fortunately, the company's finances look as solid as a castle. The £2 billion debts are well under control and the debt-to-equity ratio has fallen from 73% to 63% over the past five years. The company also has a very healthy £1.1 billion in cash, ready to weather tough times.
Risks
Now, I wouldn't be a complete fool if I didn't mention the risks. DCC's energy division faces more changes than a chameleon in a bag of BowlingSuch a complex operation can create hurdles as larger players get involved and look to aggressively gain market share. And as a global player, the business is far more exposed to currency fluctuations than many others that focus on a single region or market. Management is very experienced, but the energy sector is currently undergoing a lot of change, so nothing is guaranteed.
Meets all requirements
So, I think DCC could be the dividend favorite that will turn my passive income from a trickle into a torrent over time. It has the yield, the growth potential, and perhaps a bargain price. While the sector is risky, I think it has the solid fundamentals and track record to find long-term success. I'll buy at the next opportunity.
