There are a lot of big dividend increases coming through this year, the latest being the 36% hike by Aberdeen Asset Management at the half yearly stage, so I thought we would look in DividendMax for the large increases that are predicted to see if we can find some value.
First up, I selected a forecast dividend increase of greater than 20%. This threw up 82 companies globally which is too many to list here, so as a measure of the ability to make these increases we will refine our search by selecting those with a dividend cover greater then 2. This brings the list down to 57 companies which is still too high. Selecting an annualised yield over 3% reduces the list to 25 companies. Too many so we up the yield to over 4%.
The list in order of yield is Direct Line Insurance, Aegon, Telefonica, Renault, BNP Paribas, Warner Chilcott, Aberdeen Asset Management, Polymetal International, Alent, Ford, Assicurazioni Generali, Apple and Societie Generale.
I was reading an article the other day that was talking about how prepared UK investors are to look overseas these days compared with 5-10 years ago and this list certainly provides scope for that. Who would have thought that Apple would be yielding over 4% in such a short space of time. I still remain a bull of Apple on both dividend growth and ultimately earnings growth criteria. I simply cannot accept that they are finished as an innovative force, although this is what the market is telling us. But the market also told us that the iPod would not compete with the Walkman, the iPhone would not compete with Nokia and that the iPad was plain rubbish when it first came out.
I think we have covered enough insurers on dividend of the week and I still don't like the banks so I am going to eliminate Direct Line, Aegon, BNP Paribas, Assicurazioni Generali, Societie Generale and Apple (as a former dividend of the week).
We are left with Telefonica, Renault, Warner Chilcott, Aberdeen Asset Management, Polymetal, Alent and Ford.
Alent can be eliminated as the high growth relates to the fact that it only paid a final last year and is expected to pay an interim and a final this year. Aberdeen, whilst undoubtedly benefiting from the 'risk on' attitude in the market has simply done too much and is up over 70% in the past 12 months. Renault and Ford both look similar, but I prefer the Dollar to the Euro and Ford look slightly better value on fundamentals. However, it's European woes prevent it being dividend of the week. I have recommended miners in my recent dividends of the week so I am going to rule out Polymetal International. This leaves us with Telefonica and Warner Chilcott.
Warner Chilcott look very good value to me. They have paid special dividends in 2010 and 2012 that were huge. ($8.50 and $4.00) They are on a forward P/E of about 4.3x with earnings of around $3.30 expected. They are now planning to declare a regular cash dividend of 50 cents a year in bi-annual installments of 25 cents. (Their new dividend policy) Analysts in the US are rating this a strong buy and I can understand why. They are trading at around $14 a share and look great value. The only caveat is that they do carry a lot of debt, but this looks easily manageable with current cash flows.
Telefonica look set to start growing earnings again after two years of falls, which is not surprising given the economic environment in Spain in recent years. It announces its first quarter results on May 8th. Analysts target price for the stock ranges from euro 8.80 to euro 20.90 so quite some disagreement from top to bottom. It cancelled the 2012 dividend and share buyback program in order to pay down debt but has committed to paying 75 cents in two tranches in Q4 2013 and Q2 2014. If you can wait until November, there is a good return to be had with a reasonable prospect of an eventual return to dividends around twice this level.
However, with the low P/E, powerful cash generation and the strong buy consensus view of analysts, I am convinced that Warner Chilcott looks like a good investment for U.K. investors looking for a mid cap U.S Pharma and some exposure to the US dollar.
