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I’m constantly on the hunt for the best share to buy, but now I’m wondering whether I already own it. The stock is Costain Group (LSE: COST), which I snapped up on 29 November 2023 for 60p.
Its shares jumped almost 9% this morning (June 16) after another upbeat statement. The price now sits at 141p. That puts me 125% ahead, and it’s now the top performer in my Self-Invested Personal Pension (SIPP). Given the strong outlook, I’m tempted to buy more.
Cash and contracts
Today’s update offered plenty to like, in particular a new £10m share buyback. Costain said trading for the first half remains in line with internal expectations and described its forward work position as “strong” and “high-quality”. It’s also worth more than four times annual revenue.
That work pipeline shows long-term visibility and gives management room to plan and invest. Costain also highlighted fresh contract wins and increased activity across existing frameworks. It believes this will support further progress in the second half of the year.
There’s more. Costain’s on track to meet its target 4.5% adjusted operating margin run rate in full-year 2025. That was first flagged in May and it’s encouraging to see it repeated today.
Value and recovery
The share price was crushed in 2020 during the pandemic, but the recovery since has been solid. It’s climbed 60% over 12 months and 230% over three years.
What really caught my eye when I bought Costain was that it had £200m in net cash, compared to a market-cap of £160m. That cash pile now gave me plenty reassurance, plus Costain was earning lots of interest on it too.
Today, it’s around £180m, while the market-cap is £382m. That’s still a pretty handy cushion, although I guess the interest earned will slide when base rates fall.
I think of Costain as a growth stock, rather than an income play. But is it both? In 2024, the board literally doubled the full-year dividend from 1.2p to 2.4p. How many companies do that?
Shareholder payouts look solid, with the board targeting cover of three times earnings. The trailing yield’s now 1.71%, which looks modest, but the board’s clearly progressive.
Investors are getting regular share buybacks too – today’s follows a £10m payment last year.
Risks and rewards
Construction remains a tough business. Getting bids and pricing right is hard, and we all know what happens when costs overrun. Costain knows this better than most. Its share price fall wasn’t just about lockdown, it also took a £90m hit on contract overruns. The group says it has changed its approach since, but the risk will never completely disappear.
Our cash-strapped government could also delay infrastructure work. However, the Spending Review suggests chancellor Rachel Reeves is keen to press ahead with public projects.
Despite recent gains, the price-to-earnings ratio sits at just over 8.8. That still looks low, given the turnaround and consistent delivery.
Of the six analysts offering stock ratings, five call it a Strong Buy. One says Hold. I think Costain has the momentum to keep growing, and am seriously thinking of topping up my stake. Whether it’s ‘the best’ share to buy will only become clear later. Investors should do their own research. They may find other growth stocks they prefer, but I think it’s worth considering.
