Dividend of the Week

Stocks are considered on a medium-term time-frame, looking ahead three dividends to see what analysts or the company are forecasting. DividendMax then performs some proprietary arithmetic to come up with the annualised expected yield.

After his FTSE100 focus last week, this week Mark widened his net to look at the FTSE 350, where he looked for consistent dividend payers. The initial criterion is for CADI (consecutive annual dividend increases) of greater than 5 years. This produced 74 stocks, which is far too many to list, so a second layer of screening was added to find those companies with a forecast dividend increase greater than 10 per cent, which reduced the results to a much more manageable 9 companies: Vedanta Resources (VED), MicroFocus International (MCRO), British Sky Broadcasting (BSY), Aberdeen Asset Management (ADN), RPS Group (RPS), Unilever (ULVR), Computacenter (CCC), United Drug (UDG) and Hargreaves Lansdown (HL.). As with the previous Dividend of the week it is prudent to eliminate Vedanta as the earnings of mining stocks are under severe pressure and dividend forecasts cannot be considered reliable.

Next, dividend cover. The higher the cover, the safer the dividend pay-out is the general rule and this week the selection is for strong dividend cover of more than 2 times. This eliminates British Sky Broadcasting, Unilever and Hargreaves Lansdown.

Finally, the yield criteria is greater than 4 per cent, which eliminates United Drug and brings our list down to 4 stocks:

For its higher Price Earnings ratio and lower yield, Computacenter is eliminated at this point on valuation grounds.

Micro Focus has declared its 2013 final dividend at 17.9p per share going ex-dividend on the 4 September 2013.

Aberdeen Asset Management increased its 2013 interim dividend by 36.6 per cent. DividendMax has pencilled in a further 20 per cent increase in the final dividend to 8.5p. This is conservative, the market consensus is for 9.25p

In its recent trading statement RPS said: "Over 19 consecutive years, from 1993 to 2012, we increased our dividend in the order of 15 per cent each year. It is the board’s intention to maintain this rate of growth." Its interim results are on 1 August with a flat first half expected and growth resuming in the second half.

Let’s have a look at the recent dividend record of each company:

Micro Focus

Aberdeen Asset Management

RPS Group

Aberdeen Asset management is definitely having a great time right now, but some are nervous of financial service companies as new regulations come in and the amounts they are charging also come under scrutiny. It is also a worry when the consensus in the City is so universally consistent, with almost all analysts rating it a strong buy. Recent price history shows a reversal from a high of 492p to 388p amid the recent market turmoil as investors have pulled back from emerging markets exposure. But even after a 20 per cent fall, the shares are still 58 per cent above their 52 week low.

RPS Group has an amazing track record. It is the third highest yielder of the three with an annualised yield over three dividends of 4.35 per cent compared to Aberdeen’s 4.58 per cent and Micro Focus’ 5.45 per cent. But RPS has consistently increased its dividend by 15 per cent every year for the last 19 years. And this is unlikely to stop any time soon. Earnings are forecast to increase by 10 per cent in each of the next 2 years, and dividend cover is sufficient to keep up the 15 per cent record for some time yet. The share are well off their 52 week high of 274p and, unlike Aberdeen, are not so far above their 52 week low of 196p.

Micro Focus is currently trading at a 52 week high of 727p, almost 38 per cent above its 52 week low of 529p. It does have the highest yield of the three but overall revenue numbers were not that spectacular last year. There was also a material rise in net debt from $113.2m to $177.7m, although this was in part due to the ‘return of value’ of 50p per share to shareholders last year. The company remains strongly cash generative.

Despite being a very close call, for its lower P.E, the promise of yet another 15 per cent dividend rise, the 1,400 per cent compound growth in the dividend over the past 19 years and the comparative lack of price action compared to the other two the dividend of the week is RPS Group

We are estimating the next three dividends to be 3.52p, 3.84p and 4.04p. At Friday's closing price of 220p, this will generate a return of 4.43 per cent annualised over a 15 month period. Interim results are on 1 August 2013.

RPS yield calculation:

3.52 + 3.84 + 4.04 = 11.4p between now and 17/9/2014 (approximate ex-dividend date of the third dividend)

Ergo 11.4p / 220 = 5.2% 5.2% annualised = (5.2x365) / 436*= 4.35%

*Number of days until theoretical ex-dividend of the third dividend.

Note that if the dividend forecasts are correct, the actual yield (which DividendMax calls the ‘Optimized yield) is affected by two factors; the share price and the proximity to ex-dividend dates. DividendMax performs these calculations daily against hundreds of stocks in the U.K. and overseas producing new lists every day as prices change, dividends change and ex-dividend dates approach.

For more information about Mark Riding and DividendMax, and how its proprietary systems work, visit www.dividendmax.co.uk