Dividend of the week

The end of July and start of August always heralds a mini-'results season' among the horde of FTSE 350 companies who have half-year or full-year periods ending in June. For dividend hunters this is a good opportunity to compare and contrast payouts across a significant number of decent-sized companies. So this week we're going to look at back at the past two weeks and focus on all of the companies that have increased their dividends by more than 15 per cent. As with our previous offerings, we will attempt to provide our readers with a long list, a shortlist and ultimately our pick for dividend of the week.

The past couple of weeks has shown that a lot of heavyweight companies are producing acceptable, but not spectacular, dividend increases. Certainly, not enough to justify the lofty share prices of some of these companies. Diageo, for example, sits on a hefty premium to the market (on a PE ratio of 18.5 times) and produced only a 9 per cent increase in its half-year dividend last week.

So which companies came out on top of our screen for the biggest dividend increases, and by how much did they increase their payouts? The list is: Dialight (22.5 per cent), ARM (26 per cent), CSR (18 per cent), British Sky Broadcasting (18 per cent), Hiscox (16.7 per cent), Intertek (15.4 per cent), ITV (38 per cent), Pace (27 per cent), International Personal Finance (17.5 per cent), Telecity (40 per cent), Essentra (23 per cent), Moneysupermarket.com (20 per cent), Taylor Wimpey (15 per cent), Rightmove (22 per cent), St James's Place (50 per cent), RPS (15 per cent), Laird (21 per cent), William Hill (16 per cent), and finally Inchcape (43 per cent).

To begin narrowing this down, we will eliminate RPS, which was a previous dividend of the week, and Hiscox as it is very similar to our last dividend of the week, Catlin. That leaves us with 17 companies.

Using the DividendMax tools, and specifically the Optimiser, we can compare the annualised yields of our long list. Here are the fundamentals:

Unlike our most recent dividends of the week, it is difficult to argue that many of these stocks do not look expensive, but that goes with the territory if you are increasing your dividends by such large percentages. But with the high price-to-earnings ratios also come low yields. In order to bring the list down and, keeping an eye on income, we will eliminate all of the stocks with an annualised yield under 3 per cent.

This eliminates Dialight, ARM, CSR, Intertek, ITV, Essentra, Intertek, Taylor Wimpey, Pace, International Personal Finance, Telecity and William Hill.

Which leaves us with British Sky Broadcasting, St James's place, Moneysupermarket.com, Laird and Inchcape.

It is always worth getting another perspective when considering an investment, so what do the City's brokers say about the five survivors? The table below represents the number of brokers in each of the recommendations categories of buy, hold and sell:

At this stage, relatively low dividend cover means we eliminate Moneysupermarket.com and Laird. At its half-year results, announced last week, Laird's earnings covered the dividend 1.3 times. But having said that, management is predicting a second-half bias to the overall outcome in this financial year. If you are happy with the dividend cover, then Laird does offer a very good yield. Moneysupermarket.com is also eliminated on the grounds of its relatively low dividend cover. The market reacted badly to its half-year results last week and there are concerns over the full-year outcome after recent trading was reported to be flat. Also, after the half-year period end, the company paid a £70m special dividend, which would have taken Moneysupermarket.com from net cash into a net debt position.

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

British Sky Broadcasting

Inchcape

St James's Place

St. James's place has had a very strong run and, as a result, the shares do look expensive. But the company increased its dividend payment by 50 per cent at last week's half-year results stating: "The growth in the cash result, helped by the investment return of our funds, has been particularly strong in the first six months of the year and the Board has decided to increase the interim dividend by 50 per cent to 6.38p and shareholders can expect similar growth in the full-year dividend." Recent share price history shows a high of 640p - they currently trade at 634p, with a 52-week low of 336p.

Inchcape has recovered from a terrible time during the financial crisis to last week announce a record first-half profit before tax, a 42.5 per cent increase in the half-year dividend and a £100m share buy-back programme. No surprise, then, that the shares rose 10 per cent on Friday to put them on a fairly challenging PE ratio of 15.5 times. Inchcape's recent share price history shows a high of 654p and the shares currently trade at 645p, with a 52-week low of 353p.

British Sky Broadcasting has a very solid track record and has proved to be extremely resilient through the financial crisis. The latest dividend increase is the ninth year of consecutive growth. Its last four years show earnings growth of 24 per cent, 30 per cent, 22 per cent and 18 per cent. The board is also seeking approval for a further £500m of share repurchases. Their recent share price history shows a high of 899p and they currently trade at 837p, with a 52-week low of 709p.

As with all Dividends of the week, the final choice is always difficult, but for me British Sky Broadcasting looks like the best choice. The company's track record through the tough times shows what a solid business this is and the past four years of growth makes you wonder how such growth is rewarded with a PE ratio that is still less than 14 times. You just get the feeling that you have missed the boat with the other two with both of their share prices having almost doubled in the past 12 months. That said, with Dividend of the week, we are looking to provide an analysis and a number of ideas for our readers and St. James's place and Inchcape look like they are worth putting on the watch list.

We are estimating BSkyB's next three dividends to be 19.0p (Actual), 12.4p and 22.0p. The shares closed at 837p on Friday. At that level, it will generate a return of 5 per cent annualised over an approximate 15-month period.

British Sky Broadcasting yield calculation:

19.0 + 12.4 + 22.0 = 53.4p between now and 12/11/2014 (approximate ex-dividend date of the third dividend)

Ergo 53.4p / 837 = 6.38% 6.38% annualised = (6.38x365) / 465*= 5.00%

*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 UK 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