Dividend of the week: Global dividends

Stocks are considered on a medium-term timeframe, 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 concentrating on the FTSE 100 and FTSE 350 in the first two columns, the net is cast wider this week to look at large-cap dividend payers globally. The initial criterion was for a market capitalisation greater than 10bn in pounds, euros or dollars. But this produced a list of hundreds of companies, so the search was tightened to look for a minimum yield of 5 per cent, which produced 56 companies globally. Further tightening to include only companies forecast to increase their dividend in the coming year reduced the list to 44 stocks and then screening further for companies with a record of consecutive annual dividend increases of more than five years left 13 stocks.

Notably, every European share in the list of 44 (16 of them) was eliminated. This should give readers an idea of how European companies view dividends. We will look at European shares in future dividend of the week columns because there are some very substantial yields to be found in Europe. There is also the tricky issue of withholding taxes that will need to be addressed.

The screening process left us with a list of eight UK and five US stocks. The UK stocks that qualified were SSE (SSE), AstraZeneca (AZN), Imperial Tobacco (IMT), BHP Billiton (BLT), Vodafone (VOD), GlaxoSmithKline (GSK), BAE Systems (BA.) and British American Tobacco (BATS). From the US, where yields are generally much lower, we have Southern Company, Intel, Williams Companies, AT&T and Lockheed Martin.

As always, we take into account dividend cover. The higher the cover, the safer the dividend payout is the general rule. This week the screen demanded dividend cover of more than 1, which eliminated Williams Companies.

Next, we conducted some head to heads to further whittle down our list.

SSE v Southern company: SSE has the higher yield, higher cover and a bigger forecast dividend increase.

GlaxoSmithKline v AstraZeneca: These are also similar businesses, but GSK is increasingly moving away from pure pharmaceuticals and into more consumer-oriented areas. If you go back 20 years, this would have seen GlaxoSmithKline de-rated, but in the modern era it has been re-rated. Both companies throw off a lot of cash, but Astra has the higher yield and higher cover and the GlaxoSmithKline share price has risen a long way in recent times, which means AstraZeneca looks better value.

Imperial Tobacco v British American Tobacco: Imperial wins this battle easily in my view. It trades on a lower price to earnings ratio with a higher yield and higher cover and is due to go ex-dividend for its interim shortly.

Vodafone v AT&T: Vodafone gets the nod over AT&T with its lower price-to-earnings ratio, higher yield and higher dividend cover and, to some extent, its 'special situation' status with its hefty stake in Verizon Wireless.

BAE Systems v Lockheed Martin: These two are difficult to separate, but several factors mean we do not like either of them. They are both trading at multi-year highs and are in a difficult industry right now.

BHP Billiton is eliminated as the mining sector is under severe pressure at the moment. It is our intention to produce an article on the global mining sector in the near future.

Intel survives as it does not have a head to head.

This brings our list down to five stocks: SSE, AstraZeneca, Imperial Tobacco, Vodafone and Intel.

Looking at the fundamentals we have:

SSE is eliminated because we covered the company in a recent dividend of the week. Note that the shares go ex on 31 July. AstraZeneca has half-yearly results on 1 August and we are expecting a small increase in the interim dividend to 60p. The company has had a tough time over the past few years as key drugs have lost patent protection and has recently been bolstering its pipeline by buying companies. A return to growth would cause a re-rating of the stock, but it does not look like happening any time soon. We eliminate AstraZeneca for now.

Let's have a look at the dividends paid by each of the remaining companies over the past six to seven years:

Imperial Tobacco

Vodafone

Intel

Imperial Tobacco is probably the safest in terms of the predictability of the dividends and analysts are currently pencilling in around about 10 per cent growth in the dividend this year. This has already been met at the interim stage with an 11.1 per cent increase and investors can pick up 35.2p per share provided they buy the stock before close of play this coming Tuesday. They go ex-dividend on Wednesday 17 July. Their recent price history shows a high of 2,545p and they currently trade at 2,250p - only 11p above their 52-week low of 2,239p. If you are bearish about equities in general, Imperial is probably the safest bet with its rock solid steady growth.

Vodafone is in an interesting period at the moment and for investors there is plenty to worry about. The latest numbers from the company were pretty dire as it struggles in southern Europe. But Vodafone boasts a very strong franchise and powerful position in emerging markets such as Africa and India. There is also regular talk about the sale of its 45 per cent stake in Verizon Wireless. A valuation gap exists between the two owners. Vodafone is looking for $130bn and Verizon wants to pay $100bn according to reports. If we split the difference and assume it is worth $115bn, or £76bn at current exchange rates. Consider this against a current market cap of £93.7bn. One question seems to be about how much tax Vodafone would have to pay on the proceeds of any sale. The recent final results presentation brought about a change in dividend policy, which previously promised increases of 7 per cent each year. The current policy is to "at least maintain the dividend at current levels".

Intel is the first overseas stock that we have covered in dividend of the week. It has the best record of the three in increasing its dividend in recent times and is currently trading in the middle of its 52-week trading range at 2,390c. The big question is how it can manage to participate in the inexorable rise of mobile computing. One answer is to be in the servers that are required to power the growth of cloud computing. But for Intel to regain its stock market darling status investors will want to see evidence of its chips competing properly in the mobile space. Intel has the resources to compete, but is it agile enough in today's fast-moving markets? It is spending big to achieve its goals, but on a price/earnings ratio of 12 times, it appears investors remain unconvinced that it will achieve them.

Vodafone may conclude that the US mobile market is becoming saturated and accept a lower valuation from Verizon and focus on the fast-growing markets of India and Africa. This would release a huge amount of value to pursue a potential new strategy that may be emerging with the recent Kabel Deutschland takeover. For this reason, Vodafone is our dividend of the week. No dividend of the week feature can avoid Vodafone for long and while it would have been better to have covered it in the Optimiser 'sweet spot' (this is when the next three dividends are final, interim, final), we feel that recent corporate activity in bidding for Kabel Deutschland and recent speculation over the Verizon shareholding, make it a good time to highlight Vodafone.

We are estimating the next three dividends to be 3.35p, 7.0p and 3.45p. The shares were 193.8p at Friday's close. At 193.8p, this will generate a return of 5.27 per cent on an annualised basis over a 16-month period.