Is Hill & Smith (LON:HILS) a Hidden Gem for Long-Term Income and Growth?

Hill & Smith (LON:HILS), a UK-based industrial engineering and infrastructure services firm, has emerged as a compelling candidate for investors seeking a blend of income and growth. With a recent surge in earnings per share (EPS), margin expansion, and robust insider confidence, the company appears to be navigating a path of sustainable value creation. However, its performance is not without challenges, particularly in certain geographic segments. This analysis evaluates whether Hill & Smith merits a place in long-term portfolios, focusing on its financial metrics, insider activity, and dividend policy.

Strong EPS Growth and Margin Expansion

Hill & Smith's first half of 2025 delivered a 10% increase in EPS, driven by a 4% rise in constant currency revenue and an 80-basis-point improvement in operating margins to 17%. The company's U.S. operations, particularly in Engineered Solutions and Galvanizing Services, have been key contributors to this growth, benefiting from higher-margin contracts and strategic divestments of non-core, loss-making businesses.

Looking ahead, the firm remains on track to achieve its target of an EBITA margin exceeding 18% for fiscal year 2025. This margin expansion is underpinned by a stronger portfolio mix and cost discipline, despite headwinds in the UK and India segments, where delayed infrastructure investments and weak market demand have dampened revenue. Analysts project that earnings growth could accelerate further, with a 39% increase anticipated in 2025, suggesting a resilient business model capable of weathering macroeconomic uncertainties.

Insider Confidence: A Signal of Long-Term Commitment

Insider buying activity in 2025 underscores management's confidence in the company's long-term prospects. Key executives, including Carol Chesney and Alan Giddins, have collectively invested over £626,000 in Hill & Smith shares since December 2024, with Giddins purchasing 4,225 shares at £1,875 each in March 2025 and Chesney acquiring 1,054 shares at £1,842. Notably, no insider selling has been reported since April 2025, reinforcing the narrative of aligned interests between leadership and shareholders.

Such activity is particularly significant given the absence of major share repurchases or strategic shifts that might otherwise explain the buying. While the data does not extend beyond November 2025, the sustained insider participation over the past 24 months suggests a stable outlook for the company's value proposition.

Sustainable Dividend Policy: Balancing Growth and Income

Hill & Smith's dividend policy has evolved into a cornerstone of its appeal for income-focused investors. The company's 2025 interim dividend of £0.18 per share marks a 9% increase, with analysts estimating a payout ratio of 39% for the year-a level deemed sustainable given the projected 39% earnings growth. Historically, the firm has maintained a payout ratio of around 50% of earnings and 32% of free cash flow, striking a balance between rewarding shareholders and retaining capital for reinvestment.

Despite a notable dividend cut in 2019-reducing the payout from 22p to 10.6p-Hill & Smith has since restored and exceeded prior levels, with total dividends rising to 49p in 2024. The company's commitment to a 2.5x dividend cover ratio further bolsters confidence in its ability to sustain and grow payouts. However, the past reduction serves as a cautionary note, highlighting the importance of monitoring earnings resilience in volatile markets.

Risks and Considerations

While Hill & Smith's financials and governance signals are largely positive, investors must remain cognizant of regional vulnerabilities. The UK and India segments, which account for a significant portion of revenue, face structural challenges such as delayed infrastructure projects and weak demand. These risks could temper overall growth if macroeconomic conditions deteriorate further. Additionally, the company's reliance on U.S. dollar exposure-while beneficial in the short term-introduces currency volatility that may impact future earnings.

Conclusion: A Hidden Gem with Caveats

Hill & Smith presents a compelling case for long-term investors seeking a combination of income and growth. Its strong EPS trajectory, margin expansion, and insider confidence are hallmarks of a well-managed industrial firm. The dividend policy, though historically volatile, appears to be on a sustainable path, supported by robust earnings growth. However, the company's exposure to underperforming regions and past dividend cuts necessitate a cautious approach. For investors willing to accept moderate risk in exchange for a diversified industrial play, Hill & Smith could indeed be a hidden gem-provided they remain vigilant about macroeconomic and regional headwinds.