FTSE 100 star Ferguson's special divi appeal

Ferguson reinforced its status as a top pick in the FTSE 100 Index today as the plumbing and heating supplies firm put more generous shareholder returns in the pipeline following impressive US trading.

Shares in the company, which changed its name from Wolseley last summer, have risen more than 60% in just over two years, with some analysts thinking there's a potential for a 15% further upside to 6,200p.

The stock rose by more than 5% today, buoyed by a 10% hike in its interim dividend to 57.4 cents a share and the promise of a $1 billion (£705 million) special dividend equivalent to nearly 8% of the company's market value. This follows the sale of its Nordic building materials business Stark.

In addition, a share buyback programme of approximately £500 million announced in October is still ongoing, having so far achieved the purchase of around 4.8 million shares for $335 million.

Source: interactive investor                Past performance is not a guide to future performance

Given these promised returns, it would be a pity if investors were put off by the company's recent switch to reporting results and dividends in US dollars rather than sterling. They can still elect which currency to receive payments in, although recent FX movements mean the dollar conversion isn't quite as attractive as it might have been a few months ago.

Continued troubles for Ferguson's UK business may be another issue for shareholders. The division, which still trades as Wolseley, is the subject of a restructuring drive that includes the closure of 52 branches.

However, the UK business now accounts for just 5% of profits, compared with about a quarter a decade ago. Instead, today's 15% rise in group half-year underlying profits to $698 million was driven by strong trading in the US, where 89% of trading profits are now generated.

US revenues grew by an impressive 8.7% on an organic basis, including inflation of 1%-2% while acquisitions contributed 1.8% of additional growth.

With the US residential market growing well and industrial markets showing signs of recovery, Ferguson's better-than-expected second quarter figures prompted Barclays Capital to upgrade full-year estimates by 3%.

The bank's price target of 6,200p, up from 6,000p previously, reflects its belief that a 25% premium to Ferguson's European rivals is justified. According to BarCap's forecasts, the stock is on a projected 2018 price/earnings (PE) multiple of 17 times.

As well as the impact of better trading, the bank notes that the special dividend will add 6% to its 2019 forecast for earnings per share (EPS), with a lower US tax rate contributing 4% and 9% for this year and next, respectively.

Even after the special dividend, Bank of America Merrill Lynch thinks a net debt to underlying earnings ratio below one times meant Ferguson still had "ample firepower" for potential M&A.

The bank added: "We continue to see an attractive growth outlook in the underlying business combined with generous shareholder returns." It also has a price target of 6,200p.

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