Investors chronicle dividend of the week 08/07/2013

This week we are going to widen our net and look at the FTSE 350. The initial criterion is for a CADI (consecutive annual dividend increases) of greater than 5 years. This throws up 74 stocks, which is far too many to list.  A second criterion of forecast dividend increase greater than 10% is added and this brings our list down to a much more manageable 9 companies including Vedanta Resources, Micro Focus International, British Sky Broadcasting, Aberdeen Asset Management, RPS Group, Unilever, Computacenter, United Drug and Hargreaves Lansdown. As with the previous Dividend of the week it is prudent to immediately eliminate Vedanta as the earnings of mining stocks are under severe pressure and dividend forecasts cannot be considered reliable. (Although the first of the three dividends is declared and goes ex this coming Wednesday for 24.12p)

Next, it is necessary to consider the safety of the dividend and take a look at dividend cover.  The higher the cover, the safer the dividend pay-out is the general rule and this week the selection is for strong dividend cover of more than 2 times. This eliminates British Sky Broadcasting, Unilever and Hargreaves Lansdown.

Finally, we will tighten our yield criteria to greater than 4%. This eliminates United Drug. This brings our list down to 4 stocks:

Micro Focus, Aberdeen Asset Management, RPS and Computacenter

Looking at the fundamentals we have

For its higher Price Earnings ratio and lower yield it is necessary to eliminate Computacenter on valuation grounds.

Micro Focus have declared their 2013 final dividend at 17.9p per share going ex-dividend on the 4^th September 2013.

Aberdeen Asset Management increased their 2013 interim dividend by 36.6%. DividendMax has pencilled in a further 20% increase in the final dividend to 8.5p. This is conservative and the market consensus is for 9.25p

In its recent trading statement RPS said ‘Over 19 consecutive years, from 1993 to 2012, we increased our dividend in the order of 15% each year. It is the board’s intention to maintain this rate of growth’

The interim results are on the 1^st August and a flat first half is expected with growth resuming in the second half.

Let’s have a look at the dividends paid by each company over the past 6/7 years:

Micro Focus

Aberdeen Asset Management

RPS Group

Three remarkable track records and none of these companies could be described as expensive.

Aberdeen Asset management is definitely having a great time right now, but it is right to be nervous of financial service companies as new regulations come in and the amounts they are charging come under scrutiny. It is also a worry when the analyst’s consensus is so universally consistent with almost all analysts rating it a strong buy. They can have erratic earnings. Their recent price history shows a high of 492p and they currently trade at 388p. That is quite a reversal. However, even with that considered, at the current price they are 58% above their 52 week low.

RPS Group have an amazing track record. They are well off their 52 week high of 274p and unlike Aberdeen are not so far above their 52 week low of 196p. They are the third highest yielder of the three with an annualised yield over three dividends of 4.35% compared to Aberdeen’s 4.58% and Micro focus’ 5.45%.  RPS has increased its dividend by 15% every year for the last 19 years. This is unlikely to stop any time soon. Earnings are forecast to increase by 10% in each of the next 2 years, but the dividend cover is sufficient to keep up the 15% record for some time yet.

Micro focus is currently trading at its 52 week high at 727p some 37.85% above its 52 week low of 529p. It does have the highest yield of the three but overall revenue numbers were not that spectacular last year. Earnings and dividend increases were very good. There was also a material rise in net debt from $113.2m to $177.7m, although this was in part due to the ‘return of value’ of 50p per share to shareholders last year. They remain strongly cash generative.

It is a very close call between the three stocks, but for its lower P.E, the promise of yet another 15% dividend increase, the 1400% compound growth in the dividend over the past 19 years and the comparative lack of price action compared to the other two the dividend of the week is RPS Group

We are estimating the next three dividends to be 3.52p, 3.84p and 4.04p. They are at 220p at Fridays close. At 220p, this will generate a return of 4.43% annualised over a 15 month period. Their interim results are on the 1^st August 2013.

RPS yield calculation:                                                                              

3.52 + 3.84 + 4.04 = 11.4p between now and 17/9/2014 (approximate ex-dividend date of the third dividend)

Ergo    11.4p / 220 = 5.2%           5.2% annualised = (5.2x365) / 436* = 4.35%

*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.