Investors Chronicle dividend of the week - 09/09/2013

Investors Chronicle – Dividend of the week – Number Ten

This week we are going to look at small caps as covered by DividendMax. Our first filter is to select all of the companies in DividendMax with a market capitalisation below £1 billion. This yields a massive 133 companies and clearly we need to whittle that down to achieve our long list. We will eliminate all of the preference shares and ishares. We will also eliminate the investment trusts as we covered that sector last week. Next, we will look for a decent dividend paying track record, but not the maximum that we can go for. We set a criterion of a CADI (consecutive annual dividend increases) of more than three. This takes us down to seventy companies. Next, we set a yield criterion of more than 4% and dividend cover greater than one which cuts the list down to 23 companies.

The list is, in yield order:

Chesnara, Centaur Media, Raven Russia, Kier Group, Smiths news, Laird, Galliford Try, Kcom, Costain, Tullet Prebon, Greggs, Interserve, Photo-me, Novae, Rank, James Halstead, S&U, RPS, Rathbone Brothers, Dairy Crest, Bloomsbury publishing, Morgan Advanced Materials and Computacenter.

We are going to eliminate Chesnara, Laird, Tullet Prebon, Greggs, RPS Group, Bloomsbury and Computacenter as they have been featured in previous dividends of the week, which does not rule them out in the future, but they have been looked at fairly recently.

Increasing the yield criterion to 5% reduces the list to a more manageable seven companies and our long list is Centaur Media, Raven Russia, Kier Group, Smiths News, Galliford Try, Kcom and Costain.

At this point we can look at the fundamentals:

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

Interesting, that once we look at the smaller companies the broker coverage is very low. Is this a reflection of the tough times in the city? Does it make sense? What strikes me is that the broker’s analysts have the opportunity to make a difference by covering these small to medium sized companies. Instead, we have 25-30 brokers covering the likes of Vodafone, GlaxoSmithkline, National grid, etc. Pretty much all saying the same thing.

On the fundamentals, Centaur Media and Smiths News immediately stand out and Raven Russia is a very interesting play. Kier Group and Costain are in a difficult sector right now and compared to previous dividend of the week, Carillion look expensive. I am happy to eliminate both at this stage. Galliford Try is in the strongly recovering house building sector and they have the rating to match. They are close to their all-time high and the sector looks fully valued right now having seen a very strong past 12 months. Kcom have promised a minimum of 10% growth in the dividend in each of the next three financial years. For the relatively low rating and the promised dividend growth they make the shortlist along with Raven Russia, Smiths news and Centaur Media.

Let’s have a look at the recent dividend histories of our four remaining stocks:

Centaur Media

2013 interim up 10% from 0.75 to 0.825p

Raven Russia

2013 Interim of 2p declared via a tender offer

Smith’s News

2013 interim increased by 7.1% from 2.8 to 3.0p

Kcom

Centaur Media is a business information and events group and is due to report their final results on the 12^th September. They produced an 8% increase in pre-tax profits at the interim stage. They are currently rebasing their business and targeting 50% of their revenue from digital sources. Their recent share price history shows a 52 week high of 60p and they currently trade at 41.5p, with a 52 week low of 31p. They will benefit from a generally improved business climate and in their IMS of 11^th July stated that deferred revenues were up 27% on the prior year and that the group has a strong pipeline of new product development initiatives.

Raven Russia, in the REIT (Real Estate Investment Trust) sector announced its first half results recently and as with the prior year have announced a tender offer buy back of shares at 75p in lieu of a dividend, equivalent to a dividend of 2p per share. This is because ‘the share price remains at a significant discount to our adjusted, fully diluted NAV per share’. Their recent share price history shows a high of 79.75p and they currently trade at 73.25p, with a 52 week low of 61.5p.

Smith’s News is set to deliver strong growth in pre-tax profits in the current financial year. They have recently extended their newspaper wholesaling agreement with Associated Newspapers until October 2021 and also with COMAG until December 2020. The will issue their final results on 16^th October. Their recent share price history shows a high of 192.25p and they currently trade at 185.5p, with a 52 week low of 114.0p.

Kcom have a solid track record of increasing their dividend in recent times and have committed to ‘delivering a 10% increase per annum in full year dividend over the next three financial years, ending 31^st March 2016. Their recent share price history shows a high of 89.35p and they currently trade at 86.25p, with a 52 week low of 68.25p.

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

As with previous dividends of the week, we are left with a tough choice and investors could do well in any of the final four stocks. All have very good yields and in each case the dividend looks safe and set to grow. However, for its lowly rating and solid dividend cover and visibility of revenues over the next five years our dividend of the week is Smiths News. It is a pretty big business in terms of turnover and the scale of its operations, with Smiths, the newspaper wholesale business, Bertrams, the book distribution business and The Consortium distributing everyday consumables such as office supplies and cleaning products. Dawson Media direct distributes newspapers and magazines to airlines and rail operators. Whilst many have predicted the demise of print, there are still a great many people who want a real book or newspaper and whilst there has been a great decline in some areas of print, such as the steep decline of the yellow pages (primarily due to search engines such as Google), I do not see this happening to Newspapers, books and magazines in anything like the same way. Smiths News has increased its dividend every year since its floatation on the stock market in 2006 when it was demerged from its parent company WH Smith.

For Smiths News, we are estimating the next three dividends to be 6.2p, 3.2p and 6.6p. They were at 185.5p at Fridays close. At 185.5p, this will generate a return of 6.49% annualised over an approximate 17 month period.

Smiths News yield calculation:

6.2 + 3.2 + 6.6 = 16p between now and 07/01/2015 (approximate ex-dividend date of the third dividend)

Ergo 16 / 185.5 = 8.63% 8.63% annualised = (8.63x365) / 485* = 6.49%

*Number of days until theoretical ex-dividend of the sixth 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. 

For more information about Mark Riding and DividendMax, and how its proprietary systems work, visit www.dividendmax.co.uk