The discussion of dividends is more often than not dominated by the yields they represent. Given that the investment objective of many dividend hunters is, in part at least, to find a way to beat the measly interest rates on offer by deposit accounts, such a focus is understandable. Yet many professional income fund managers are just as interested in the rate of dividend growth, and the likelihood that those dividends will continue to grow.
That's why this week we've scanned the FTSE 250 index and have selected all of the companies that have consecutive annual dividend increases (CADI) of more than five years as a starting point. This yields us 65 companies, which are too many to list. As this is 'dividend of the week' it seems inappropriate to include any companies with an annualised yield of less than 3 per cent, which further reduces our list to 34 stocks. As we will be producing a dividend of the week that covers just the investment trust sector in the coming weeks, we're going to eliminate these, which reduced the number to 26. By eliminating previous dividend of the week RPS along with Micro Focus and Computacenter, who featured heavily in that analysis, we come down to 23 companies.
Dividend cover is a measure of the strength of a company's ability to pay its dividend and we are going to eliminate those companies with cover of less than two times. Our long list of 17 survivors is:
Catlin, Carillion, RPC, Greggs, Tullett Prebon, Beazley, Interserve, UBM, WH Smith, Mitie, Stagecoach, Hiscox, Cobham, Diploma, United Drug, PZ Cussons and Synergy Health.
There are some companies in there with mighty dividend track records, such as PZ Cussons, which just last week increased its dividend by 10 per cent and hit the milestone of its 40th year of consecutive dividend increases. But we'll rule these out by tightening up the annualised yield criteria to 4.5 per cent, which drops Mitie, Stagecoach, Hiscox, Cobham, Diploma, United Drug, PZ Cussons and Synergy Health from the picture.
WH Smith has just gone ex-dividend on the 17 July, so our next ex-dividend date countdown is showing 165 days. You cannot complain about the shares' performance, but we are looking for better timings in terms of the dividend. Interserve, meanwhile, is steady, if unspectacular and very well-liked by brokers - with seven out of eight saying buy or strong buy - but looking at their five-year record of profits growth from £79.9m in 2008 to a projected £81.6m in 2013, we can do better. We like Beazley, and you do have the safety of the recently declared half-year dividend of 2.9p. It rewarded shareholders with a 'special' dividend last year, but among the insurers in this analysis it is losing out to Catlin purely on yield considerations. Tullett Prebon just looks too risky to me and its industry backdrop remains very tough. The difficulty is borne out by the broker's recommendations. Out of 10, there are three strong buys, one buy and two strong sells, with four sitting on the fence. Greggs is having a tough year and while I expect it to eke out a small overall increase in the dividend this year to maintain its proud record of increases. This, though, will be at the expense of dividend cover as earnings are forecast to fall. That completes the process of elimination for this particular analysis.
That leaves us with a shortlist comprising UBM (UBM), RPC (RPC), Carillion (CLLN) and Catlin (CGL). Here's how they look on a fundamentals basis:
| Company | Forward PE ratio | Dividend cover | Annualised yield |
|---|---|---|---|
| RPC | 12 | 2.4 | 5.84% |
| Catlin | 8.7 | 2.0 | 7.88% |
| UBM | 8.9 | 2.0 | 4.90% |
| Carillion | 7.8 | 2.2 | 7.30% |
Clearly, none of these stocks are expensive, and all offer very respectable yields. All have sufficient cover to increase their dividends next time around, and while growth at Carillion and UBM looks a little anaemic, this is to be expected as both are in relatively troubled sectors. RPC has a better growth outlook and this is reflected in the higher earnings multiple than the other three companies on the final shortlist.
As a final check it's worth having a look at what the brokers think about the four shortlisted shares. The table below represents the number of brokers in each of the recommendations categories of buy/hold/sell:
| Company/broker recommendation | Buy | Hold | Sell |
|---|---|---|---|
| UBM | 13 | 10 | 0 |
| RPC | 4 | 0 | 0 |
| Carillion | 4 | 7 | 1 |
| Catlin | 9 | 4 | 5 |
Let's have a look at the dividends paid by each of our shortlist over the past six years:
UBM (formerly United Business & Media)
| Year | Dividend (p) | Growth (%) |
|---|---|---|
| 2006 | 18.0 | - |
| 2007 | 21.6 | 20.00% |
| 2008 | 23.8 | 10.20% |
| 2009 | 24.2 | 1.70% |
| 2010 | 25.0 | 3.30% |
| 2011 | 26.4 | 5.60% |
| 2012 | 26.7 | 1.10% |
RPC
| Year | Dividend (p) | Growth (%) |
| 2006 | 8.4p | - |
| 2007 | 9.0p | 7.10% |
| 2008 | 9.3p | 3.30% |
| 2009 | 10.5p | 12.90% |
| 2010 | 11.5p | 9.50% |
| 2011 | 14.4p | 25.20% |
| 2012 | 14.9p | 3.90% |
Catlin
| Year | Dividend (p) | Growth (%) |
|---|---|---|
| 2006 | 20.1p | - |
| 2007 | 21.9p | 9.00% |
| 2008 | 23.2p | 5.90% |
| 2009 | 25.0p | 7.80% |
| 2010 | 26.5p | 6.00% |
| 2011 | 28.0p | 5.70% |
| 2012 | 29.5p | 5.40% |
Carillion
| Year | Dividend (p) | Growth (%) |
|---|---|---|
| 2006 | 9.0p | - |
| 2007 | 11.0p | 22.20% |
| 2008 | 13.0p | 18.20% |
| 2009 | 14.6p | 12.30% |
| 2010 | 15.5p | 6.20% |
| 2011 | 16.9p | 9.00% |
| 2012 | 17.25p | 2.10% |
In its recent interim management statement, RPC announced that sales were ahead of last year and that adjusted operating profit was ahead of management expectations. The group has made a satisfactory start to the year. There is the benefit of the dividend going ex on 7 August for 10.6p. Its recent share price history shows a high of 477p and the shares currently trade at 441p, with a 52-week low of 378p.
Catlin has increased the dividend paid to its shareholders every year since the IPO in 2004. The annual dividend paid to shareholders has increased by 173 per cent since 2004, a compound growth rate of 13 per cent. It will produce its half-year results on 9 August and a further dividend increase is expected. In its recent interim management statement, it reported an increase in gross and net premiums of 12 per cent. Dividend increases have been in the 5-6 per cent region in the past few years and if the company wishes to keep up the compound growth rate boast, it is going to have to have a step up in the dividend at some point. There were no great disasters in the first half of the financial year, so the scope for a good dividend increase is there. Realistically, though, another 5-6 per cent is most likely. Its recent share price history shows a high of 552p and the shares currently trade at 494p, with a 52-week low of 424p.
UBM had an expected poor first quarter but is predicting a strong pick-up and in its recent interim management statement it affirmed its guidance for the full year of revenue growth of between 3 and 7 per cent. A dividend increase of around 5 per cent can be expected for the coming year. It will produce its half-year results for the six months to 30 June on 1 August. Its recent share price history shows a high of 788p and they currently trade at 681p, with a 52-week low of 607p.
Carillion's shareholders can expect a small dividend increase this year as the company has the dividend cover to facilitate one; although analysts are forecasting a drop in earnings in the current financial year. In its recent trading statement on 3 July, Carillion said that first-half operating profit was expected to increase, while it boasts a strong order pipeline, a solid order book and good revenue visibility. The company has announced that its half-year results will be reported to the market on 22 August. Their recent share price history shows a high of 332p and they currently trade at 294p, with a 52-week low of 242p.
As with all Dividends of the Week, the final choice is always difficult, but for me Catlin looks to just have the nod over the other three. It offers the largest yield but, more importantly, appears to have the financial strength to potentially increase its dividend by more than the market is expecting, even if broker opinion on the shares is split. This may be due to the investment mix that Catlin holds because, operationally, it seems to be having a very good year. A contrarian stance is often what it takes to unearth value, too.
We are estimating the next three dividends to be 10.0p, 21.0p and 10.5p. The shares were at 494.0p at Friday's close. At 494.0p, this will generate a return of 7.9 per cent annualised over an approximate 13-month period.
