Full year underlying revenue fell 3.6% to £8.3bn. This was driven by a decline in Construction Services caused by lower US volumes. Underlying operating profits increased from £51m to £197m, reflecting increased productivity compared to last year's pandemic-related disruption and lower losses in UK Construction.
A 9p full year dividend was announced, six times the 2020 dividend and a 40.6% increase from 2019 levels. The group's also increasing its share buyback programme by £50m to £150m.
Management expects to see Construction Services and Support Services deliver "further" profit growth in 2022.
The shares were up 2.8% following the announcement.
View the latest Balfour Beatty share price and how to deal
Our view
The pandemic is firmly in the rear view mirror for Balfour Beatty, with operating profits now beyond pre-pandemic levels. That means growth has become the focus.
We're pleased to see margins creeping back up to more normal levels. Even in the good times margins in the construction sector are pitifully thin. An operating profit margin of 3% is pretty impressive in the UK, while in the US as low as 2% is good going. Such low margins leave little room for error. That means inflation has the potential to upset progress moving forward.
Some of the group's private sector property projects, which went wrong due to the pandemic, wiping out profits. No one saw the shutdowns coming, but Balfour's now become a little choosier about its private-sector work. This means the order book's a little leaner, but management is confident that it's of better quality, particularly in the UK where the public sector makes up roughly 90% future orders. Infrastructure spend is a key priority in the US and UK, which should provide support for large construction groups.
All told, we think the direction of travel is a positive one. The pandemic didn't leave behind much scarring on the balance sheet, and the influx of profit this year helped the group improve its net cash position.
That brings us to the dividend.
Having trimmed the pay-out during the pandemic the dividend has since been hiked. The very strong balance sheet will have played a part in that, as did strong demand and margin improvements. The group's also upped its buyback scheme by £50m. That will make maintaining lofty dividend payments more affordable moving forward since excess profits will be shared out between a smaller group of investors. Remember, though, that pot could shrink considerably if inflation persists and dividends are variable and not guaranteed.
Investors should remember Balfour Beatty's fortunes will wax and wane with the wider economy. If a government-led infrastructure boom fails to make it through to the bottom line then the dividend will be back on the chopping block. With a valuation some way below the long-term average, the market's aware of these challenges and the risks ahead.
Balfour Beatty key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Full Year Results (underlying)
Lower volumes at US Construction and Hong Kong's Gammon meant Construction Services revenue fell 3% to £6.7bn. Operating profits more than doubled to £79m, reflecting improved productivity and site reopenings following last year's disruption The order books for these two segments grew 2% and 24% respectively, ignoring the effect of exchange rates.
Losses in the UK construction business narrowed from £26m to £2m. The division returned to profit in the second half of the year following write-downs related to three private sector property projects in central London. The order book decreased by 12%, reflecting more cautious bidding particularly with private clients.
Support Services revenue was flat at £1.1bn as higher power, road maintenance and rail maintenance volumes were offset by a decline in gas and water. Operating profits more than doubled to £102m, reflecting the impact of the group's withdrawal from gas and water last year and the completion of ElecLink project in the Channel Tunnel. The order book declined from £2.7m to £2.5m, driven by fewer utilities contracts due to Balfour Beatty's exit from gas and water.
Infrastructure Investments sold £80m worth of investment properties over the course of the year. As sales were paused in 2020, this meant operating profits rose substantially from £8m to £49m. The portfolio's now valued at £1.1bn, up 2% from 2020.
Free cash flow improved from £242m to £318m, reflecting higher profits. This helped the group's net cash position increase from £581m to £790m.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.