Dividend of the week

Using the DividendMax Optimiser tool, which screens companies by their expected future dividend payments to work out an annualised forward yield projection, this week we are concentrating on the UK by taking the top 15 stocks on the Optimiser as of the close of play last Friday. We do not need to apply any further filtering criteria. We will just simply list the highest-yielding stocks on a three dividend basis to give us our long list.

The list is, in yield order:

Admiral (ADM), Chesnara (CSN), Centaur Media (CAU), Resolution (RSL), Raven Russia (RUS), Carillion (CLLN), Catlin (CGL), John Laing Infrastructure Fund (JLIF), Kier Group (KIE), Bloomsbury Publishing (BMY), Balfour Beatty (BBY), IG Group (IGG), Imperial Tobacco (IMT), AstraZeneca (AZN) and Ashmore Group (ASHM).

We can immediately eliminate Admiral and Catlin as they have already been dividends of the week.

Because of the high-yielding nature of the initial list and that fact that it forms a snapshot of dividend expectations over the coming 18 months, we are going to focus on the consistency of previous dividends from the candidates and select only those companies that have a record of consecutive annual dividend increases for the past five years.

This eliminates Centaur Media, Resolution, Raven Russia, John Laing Infrastructure fund, Kier group, Balfour Beatty, and Ashmore Group in one fell swoop. The remaining companies are Chesnara, Carillion, Bloomsbury Publishing, IG Group Holdings, Imperial Tobacco and AstraZeneca.

At this point we can look at the fundamentals: 

Chesnara is due to report its half-year results on 30 August. The recent share price history shows a high of 270p and the shares are currently trading close to that level at 260p, with a 52-week low of 176p. We think the dividend is safe, but there was a considerable weakening of performance in the first quarter due to weak bond yields and a marked deterioration in net cash generation. As with much of the insurance sector, the shares have seen a strong rise in the past 12 months and we would rather steer clear for now as the shares seem pretty fully valued.

Carillion announced its first-half results last week, when it also increased the dividend payout by 2 per cent. It has a very strong pipeline and management expects a better second-half performance. The shares trade on a lowly PE ratio, so downside should be limited by this and the prospect of a strong dividend, which is well covered. Recent share price history shows a high of 332p and a 52-week low of 245p and the shares currently trade around the middle of that range at 289p.

We have discussed AstraZeneca in previous dividends of the week and we still take the view that the best approach is to wait and see how the drugs pipeline develops over the next year or so. The market has already priced in some future success. The shares are currently trading at 3246p against a 12 month range of 2,792p-3,521p.

Imperial Tobacco has recently paid its half-year dividend and looks set to grow its dividend payout by about 10 per cent this year. It remains a solid and dependable income play. Their recent share price history shows a high of 2,534p and the shares currently trade at 2,154p, with a 52-week low of 2,128p.

Bloomsbury Publishing looks set for a good year in 2013 and still trades on a relatively undemanding PE ratio of 10.9 times. The shares go ex-dividend on Wednesday for the 4.56p dividend payment announced in its preliminary results. At 142p, the shares are trading just shy of their recent high of 146p.

IG Group is operating in tough times for its sector. Recent director deals also give mixed signals, with chief executive Tim Howkins recently selling about £5.5m-worth of shares, although this was partly to fund a divorce settlement. In contrast, finance director Christopher Hill bought approximately £200,000 of stock at 572.25p. Earnings are set to be flat this year and on a PE ratio of 14.7, the shares look expensive. The final dividend is declared at 17.5p, going ex-dividend on 18 September.

What are the brokers saying about the six candidates? The table below represents the number of brokers in each of the recommendations categories of buy/hold/sell:

We are going to eliminate AstraZeneca and Chesnara for the reasons stated earlier. We are also not particularly comfortable with IG Group on a PE ratio of almost 15 times earning and, in spite of strong support from analysts, we are also going to eliminate them from this analysis. This leaves us with our shortlist of three stocks. Let's have a look at their recent dividend histories:

Bloomsbury Publishing

Carillion

Imperial Tobacco

We expect that all three companies will continue to increase their dividends

As with previous dividends of the week, we are left with a difficult choice, but looking at the fundamentals and given its very strong order book and the near completion of the descaling of its construction business, Carillion looks set for growth over the coming years and a moderate re-rating could lead to a strong share price performance. The yield will underpin the share price and the downside looks very limited.

Imperial Tobacco remains very solid and will continue to grow. It is a classic defensive stock and near the bottom of its trading range as investors have moved away from defensives. Imperial looks very good value at the current share price and there is nothing wrong with a defensive stock that grows at the rate Imperial has managed over the years since demerging from Hansen.

Bloomsbury Publishing, which published the Harry Potter series, has safely negotiated the move from physical books to e-books and looks set to continue growing as it exploits global opportunities, including the widening use of the English language and the appetite and ease of delivery of e-books as hardware in the form of tablets and e-readers increases in quality and quantity and market penetration. Bloomsbury has come through the difficulties posed by the internet and the ebook challenge and has embraced new technology positively. It has approximately 13 per cent of its market capitalisation in cash and has been making acquisitions of prestigious titles over the years, one example being Wisden, the Cricketers Almanac.

Bloomsbury has used the Harry Potter money wisely to build a diversified publishing group and embrace new trends. It has a strong balance sheet and some interesting new titles due in the current year.

A tough choice indeed and investors could do well in any of the final three stocks, but we believe that the very strong order book and the completion of the rescaling of the UK construction business makes Carillion look attractive, especially on a PE ratio of under eight and it is therefore our dividend of the week.

For Carillion, we are estimating the next three dividends to be 5.5p (declared), 12.32p and 5.7p. The shares were trading at 289p at Friday's close. At 289p, this will generate a return of 7.97 per cent annualised over an approximate 13-month period.

Carillion yield calculation:

5.5 (A) + 12.32 + 5.7 = 23.52p between now and 3/09/14 (approximate ex-dividend date of the third dividend)

Ergo 23.52/289 = 8.13% 8.13% annualised = (8.13x365) / 372*= 7.97%

*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