Investors Chronicle dividend of the week - 30/09/2013

Investors Chronicle – Dividend of the week – Berkeley Group holdings

Recent falls in the market, which are welcomed at DividendMax as it drives up yields and makes stock selection easier, have lead us to have a look at some of the faster growing dividends to see if there has been any over-selling that may give us an opportunity to pick up a fast growing dividend at a knock-down price.

This week we are going to concentrate on the U.K. and focus on the top fifteen dividend growth stocks in the Optimiser as of the close of play last Friday. Our initial filter is for stocks with an FDI (forecast dividend increase) of greater than 20%. This reveals 29 companies which are too many so we will add in a further filter that will allow us eliminate all of those companies that may be re-instating the dividend. So, we set a CADI (consecutive annual dividend increases) of >1 and an annualised yield of greater than 3%.

The list is, in yield order:

Berkeley Group holding, Raven Russia Ltd, Direct Line Insurance Group, Laird, Aberdeen Asset Management, WPP, Paragon group of companies, Inchcape and St James’s place.

Let’s have a look at their recent price history

Given that we are looking for stocks that have retreated considerably from recent highs, we will eliminate St James’s Place, Inchcape, WPP and Raven Russia

The remaining companies are Direct Line Insurance Group, Laird, Aberdeen Asset Management, Berkeley Group holdings and Paragon group of companies.

At this point we can look at the fundamentals:

*over 4 dividends

We are, rightly or wrongly going to eliminate Direct Line at this stage as it got through the initial criteria of an over 20% increase on the grounds of paying no interim last year and so the reality is that whilst the full year dividend will increase by more than 20%, the final to final dividend increase is expected to be about 7%.

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

I am tempted to go with the brokers and eliminate Laird at this stage in spite of the higher yield. With dividend cover at 1.5, they will need to grow earnings significantly to keep up the 20% increases. Earnings have been inconsistent in recent years and they made a loss in 2010 which lead to a reduced dividend that year. It was a tough call as Paragon group did suffer big drops in the dividend from 2006 to 2008.

This leaves us with our shortlist of three stocks. Let’s have a look at their recent dividend histories:

Paragon Group

2013 interim dividend of 2.4p (paid)

Berkeley Group

Aberdeen Asset Management

2013 interim dividend 6.0p (paid)

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. Paragon looks to be emerging from the financial crisis and is getting stronger. The ‘buy to let’ market is performing very well and so long as we have low interest rates, ‘buy to let’ is one of the avenues (along with dividends from equities) that wealthy individuals have been taking to replace the income that they have lost from deposit accounts and building society accounts.  

Aberdeen Asset Management has been a dividend paying powerhouse for some years and this is set to continue. There is very little downside, especially if, as we are, you are confident of a sustained bull market over the next 5 years.

Berkeley Group, like Persimmon has introduced a massive cash return to shareholders which began in the 2013 financial year with a return of 74p per share. This is only the start of it. The total return to shareholders is set to be £1.7 billion (1300 pence per share) by 30^th September 2021. The first milestone is 30^th September 2015 by which time 434p per share will be returned to shareholders; 74p of this has been paid leaving 360p to pay over the next two years.

In my view the housebuilders are in for a golden few years. A severe housing shortage has developed as a result of the financial crisis in the U.K, where unlike Spain and Ireland, we have never built too many houses. The average age of the first time buyer has rocketed to what are frankly unacceptable levels and the pent up demand is huge. The Governments ‘help to buy’ scheme will continue up until at least the next general election as I rather cynically expect a strong rise in house prices to produce the feel good factor that will help them to win the next election.

A tough choice indeed and investors could do well in any of the final three stocks, but we believe that Berkeley Group offers outstanding returns to investors for many years to come. Set against a backdrop of strong recovery in the housing market, driven by election ambitions and some very very strong numbers in the latest results statement, Berkeley look outstanding value.

For Berkeley, we are going to have to look out 4 dividends as the timing of the next 360 pence per share is uncertain. We are estimating the next four dividends to be 20p, 70p and 30p and 240p.  They were at 2054p at Fridays close. At 2054p, this will generate a return of 9.10% annualised over an approximate 23 month period.

Berkeley yield calculation:

20 + 70 + 30 + 240 = 360p between now and 02/09/2015 (approximate ex-dividend date of the fourth dividend)

Ergo 360 / 2054 = 17.53% 17.53% annualised = (17.53x365) / 702* = 9.11%

*Number of days until theoretical ex-dividend of the fourth 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