Investors Chronicle Dividend of the week 30/07/2013

Investors Chronicle – Dividend of the week 30/07/2013

This week we are going to look at the FTSE 250 and as with our previous offerings attempt to provide our reader with a longish list, a shortlist and ultimately our winner. It is our aim to be thought provoking and at least at the shortlist stage provide our reader with a number of income plays that will then go onto to provide food for thought for their investing brains.

So, to start with we are going to use the Optimiser to select the FTSE 250 index and select all of the companies that have consecutive annual dividend increases (CADI) of more than five years. 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% and that reduces our list down to 34 stocks. We will be producing a dividend of the week that covers just the Investment Trust sector in the coming weeks so today we are going to eliminate all of the Investment Trusts from the remaining 34 stocks. This brings the list down further to 26. By eliminating previous dividend of the week RPS Group along with Micro Focus and Computacenter, who featured heavily in that analysis, we come down to 23 companies.

Dividend cover is a measure of strength of the ability of a company to pay its dividend and we are going to eliminate those companies with cover of less than two. Our long list of 17 is below. There are some companies in there with mighty dividend track records such as Greggs the baker and PZ Cussons, which has just last week, increased its dividend by 10%. This being the 40^th year of consecutive dividend increases.

Catlin, Carillion, RPC, Greggs, Tullett Prebon, Beazley, Interserve, UBM, WH Smith, MITIE, Stagecoach, Hiscox, Cobham, Diploma, United Drug, PZ Cussons and Synergy Health form our long list.

In order to shorten the list we are going to have to up the annualised yield criteria to 4.5%, which drops MITIE, Stagecoach, Hiscox, Cobham, Diploma, United Drug and PZ Cussons and Synergy Health.

WH Smith has just gone ex-dividend on the 17^th July so our next ex-dividend date countdown is showing 165 days. You cannot complain about their performance, but we are looking for better timings in terms of the dividend. Interserve are steady, if unspectacular and very well-liked by the brokers with seven out of eight saying Buy or Strong Buy, but looking at their five year track 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 interim dividend of 2.9p. They rewarded shareholders with a ‘Special’ dividend last year, but in this analysis, they are losing out to Catlin purely on yield considerations. Tullett Prebon just looks too risky to me and their industry backdrop remains very tough. The difficulty is borne out by the broker’s recommendations. Out of 10, there are three strong buy, one buy, two strong sell with four sitting on the fence unable to decide. Greggs are having a tough year and whilst I expect them to eke out a small overall increase in the dividend this year to maintain their proud record; this will be at the expense of dividend cover as earnings are forecast to fall. That completes the process of elimination for this particular analysis;

Our Shortlist comprises UBM, RPC Group, Carillion and Catlin;

Looking at the fundamentals we have:

Clearly, these stocks are not expensive and they all offer very good yields. All have sufficient cover to increase their dividends next time around. Carillion and UBM growth looks a little anaemic, but this is to be expected as both are in relatively troubled sectors. RPC have a better growth outlook and this is reflected in the earnings multiple.

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

Let’s have a look at the dividends paid by each of our shortlist over the past 6 years:

UBM (formally United Business & Media)

RPC Group

Catlin Group Ltd

Carillion

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. They have made a satisfactory start to the year. There is the benefit of the dividend going ex in 10 days on August 7^th for 10.6p. Their recent share price history shows a high of 477p and they 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% since 2004, a compound growth rate of 13%. It will produce its half yearly results on the 9^th August and a further dividend increase is expected. In its recent Interim Management Statement they reported an increase in gross and net premiums of 12%. Dividend increases have been in the 5-6% region in the past few years and if they wish to keep up the compound growth rate boast, they are going to have to have a step up in the dividend at some point. There were no great disasters in the first half of their financial year, so scope for a good dividend increase is there. Realistically though, around 5-6% is most likely. Their recent share price history shows a high of 552p and they 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 affirmed its guidance for the full year of revenue growth between 3 and 7%. A dividend increase of around 5% can be expected for the coming year. It will produce its interim results for the half year to 30^th June on the 1^st August. Their recent share price history shows a high of 788p and they currently trade at 681p, with a 52 week low of 607p.

Carillion shareholders can expect a small dividend increase this year as they do have the dividend cover to facilitate one; although analysts are forecasting a drop in earnings in the current financial year. In their recent trading statement on 3^rd July, they said that first half operating profit was expected to increase. They have strong order pipeline, a solid order book and good revenue visibility. Carillion have announced that their interim results will be reported to the market on the 22^nd 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. I feel that they have the financial strength to potentially increase their dividend by more than the market is expecting. Clearly, the brokers do not agree with quite a number suggesting Catlin is a strong sell. This may be due to the Investment mix that Catlin holds. Operationally, they seem to be having a very good year. We like to take a contrarian stance at DividendMax and we will stick with Catlin.We are estimating the next three dividends to be 10.0p, 21.0p and 10.5p. They are at 494.0p at Fridays close. At 494.0p, this will generate a return of 7.90% annualised over an approximate 13 month period.

Catlin yield calculation:

10.0 + 21.0 + 10.5 = 41.5p between now and 20/08/2014 (approximate ex-dividend date of the third

dividend)

Ergo 41.5p / 494.0 = 8.40% 8.40% annualised = (8.40x365) / 388* = 7.90%

*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 U.K. and

overseas producing new lists every day as prices change, dividends change and ex-dividend dates

approach.