ii view: record for Smiths Group shares amid bullish outlook

Full-year results to 31 July

• Organic revenues up 1.2% to £1.94 billion
• Operating profit margin up 0.1% to 20.6%
• Adjusted operating profit up 1.9% to £399 million
• Final dividend of 33.5p per share
• Total dividend for the year up 5.4% to 48.5p per share
• Net cash of £1.75 billion, up from net debt of £843 million as of late January

Guidance:

• Now expects full-year 2027 organic sales growth of 4%
• Targeting an operating profit margin of 21%
• Medium target – growth in organic revenues up to 7% and operating profit margin up to 23%

Chief executive Roland Carter said:

“2026 was a year of significant strategic progress. We transformed our portfolio and unlocked over £3 billion of value which repositioned Smiths as a focused, premium industrial engineering company.

"Over several years, we have purposefully aligned our business to attractive end-markets and demand trends that offer structural long-term growth.”

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ii round-up:

Smiths Group (LSE:SMIN) today detailed growth in annual sales and profit, with the refocused engineer laying out demanding medium-term growth targets.

Exposure to trends including energy security and heat transfer systems connected to data centres is now expected to generate growth in adjusted sales of up to 7% over the medium term, with a targeted profit margin of 23%. That compares with organic or adjusted sales stripped of acquisitions of 1.2% over this latest financial year and profit margin of 20.6%.

Shares in the FTSE 100 company rose 6% in UK trading to a record high, having come into these latest results up by a tenth so far in 2026. Nuclear and defence focused engineer Babcock International Group (LSE:BAB) is down by around a fifth during that time. The FTSE 100 index is up almost 8% year-to-date.

Previous business sales now leave Smiths focused on its John Crane energy business selling items such as mechanical seals to oil and mining companies, plus the Flex-Tek division that sells heating and cooling systems to industries including construction, aerospace and data centres.

Acquisition proceeds received leave Smiths with net cash of £1.75 billion as of late July, a move from net debt of £843 million in late January and the announcement of interim results.

Having already returned £1.5 billion to shareholders via share buybacks, a further £1.5 billion is yet to be returned via buybacks.

A final dividend of 33.5p per share, payable to eligible shareholders on 23 November, takes the total payment for the year up 5.4% to 48.5p per share.

Smiths expects organic sales growth for the 2027 financial year of around 4% with an operating profit margin of 21% in management sights.

A first-quarter trading update is likely to be announced mid-to-late November.

ii view:

Originally a watchmaker, Smiths Group is today focused on the growing market segments of flow control, thermal solutions, construction and aerospace. John Crane generated most operating profit during this latest financial year at 69% with Flex-Tex the balance of 31%.

Geographically, the Americas topped sales at 63%, followed by Europe at 15%, Asia Pacific 13% and the rest of the world the balance of 9%.

For investors, the downside of a more focused business is reduced diversification. Many customers of the remaining John Crane and Flex-Tek businesses are from cyclical industries such as energy, mining, construction and aerospace. Group sales to the US leave Smiths exposed to Trump trade tariffs, while a forecast price/earnings (PE) ratio above the three-year average may suggest the shares are not obviously cheap.

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More favourably, the move to just two of the group’s previous four divisions now helps provide a more focused valuation. The remaining John Crane and Flex-Tek business could be more vulnerable to takeovers going forward. Proceeds from the sale of businesses are largely being returned to shareholders, avoiding the potential for management to reinvest badly, while 75 years of consecutive dividend payments leaves the shares on a forward dividend yield near 2%.  

In all, and while risks remain, exposure to expected growth areas like data centres and aerospace is likely to keep investors firmly supportive of this specialist engineer.

Positives:

• A diversity of business type, underlying customer, and geographical location
• High proportion of aftermarket revenues

Negatives:

• Exposure to volatile industries                      
• Uncertain economic outlook

The average rating of stock market analysts:

Buy