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With the likes of Diageo, Tesco, and Unilever, the UK has some great dividend stocks. But I think there might also be some outstanding opportunities outside the FTSE 100.
Renew Holdings (LSE:RNWH) is a collection of businesses that maintain the UK’s water, electricity, and rail infrastructure. And I think there’s an awful lot to like about the stock.
Infrastructure
Renew’s operations involve maintaining, replacing, and upgrading, things like rail tracks, transmission lines, and water pipes. And there are a lot of attractions to being in this industry.
The UK’s infrastructure is critical to it functioning. As a result, there’s significant funding committed to the markets the firm operates in and this is protected by regulation.
On top of this, the projects it engages in require a lot of specialist knowledge and technical expertise. This creates a significant barrier to entry for potential competitors.
Despite this, Renew does have competitors, including Balfour Beatty, Kier Group, and Costain. All of these are significantly larger than Renew, giving them advantages that come with scale.
Renew however, differentiates itself by focusing on maintenance instead of new builds. As a result, it has deep expertise in the distinctive requirements associated with ongoing repairs.
The firm has a decentralised structure, with subsidiaries specialising in different areas, from repairing bridges to fixing pipes. And focusing on specific niches has generated great results.
Growth and dividends
Renew shares currently come with a dividend yield of around 2.75%. But the company only distributes around a third of the free cash it generates. The rest is reinvested into the business to fund growth. And a good amount of this has involved acquiring smaller companies over the last 10 years.
This can be risky, but it has generated impressive results for Renew. Revenues have almost doubled in the last decade and earnings per share have gone from 9p to 53p.
Importantly, the company’s managed to maintain strong returns on equity over this period. That’s a good sign the firm’s doing a good job of generating growth with the cash it retains.
The stock’s down 25% since the start of the year and the big reason is the January trading update. Renew (without irony) reported that rail improvement works were subject to delays.
The firm reiterated though, that its customers remain committed to record levels of investment in rail infrastructure. That makes the drop in the stock look like an opportunity to me.
A stock to consider buying
Until recently, Renew Holdings wasn’t on my radar at all. But while it doesn’t operate in a particularly high-octane industry, I think it looks very attractive as a business.
Maintaining the UK’s infrastructure is non-optional and spending is committed by regulation and this should give the company plenty of opportunities for future growth. Renew has grown impressively over the last 10 years and I don’t see a big change on the horizon.
So I’m getting ready to take a closer look at this stock.
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