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Investors Chronicle dividend of the week - 21/10/2013

Investment Tools Ltd.
Investors Chronicle dividend of the week - 21/10/2013

Investors Chronicle – Dividend of the week

This week we are going to continue to be sector based and have a look at the banks globally. They have had a good run as they have been helped to rebuild their balance sheets via Quantitative Easing and also more specific schemes like help to buy from the UK government, where the government effectively mitigates mortgage risk by reducing the payments to be made by the mortgagee.

Love them or Loath them, the world’s banks are a huge part of the global economy and therefore must be represented in any reasonable investment portfolio. It would be nice to look at Lloyds bank, but their recent lack of dividends excludes them from this analysis.

To start we use DividendMax to select all of the banks globally and this presents us with 31 companies. Given the state of distress that many banks still find themselves in, our opening criterion is for an expected dividend increase in the coming year and this yields us 17 stocks. Looking for an annualised yield over 3% brings it down to 12 stocks which can be listed:

Banco Santander, HSBC, Credit Suisse, Barclays, Close Brothers, Wells Fargo, Bank of Georgia Holdings, JP Morgan Chase, Standard Chartered, UBS, Credit Agricole and BNP Paribas. The current investor favourites, Lloyds and RBS do not appear as they have not paid a dividend for a long time.

I do not profess to be any sort of an expert on banking stocks so we are going to rely on our tools to pick out the strong companies and try to weigh that up against some of the very high yields that can be had from the 'weaker' companies.

We add a CADI (consecutive annual dividend increases) of greater than one to give us some indication that the bank has recovered from the financial crisis. This eliminates the two French banks and Credit Suisse.

Banco Santander has a fabulous yield and investors may well be tempted by it. If so, contact your broker and discuss the withholding tax situation which the Spanish Government has levied since 01/01/2012 at the rate of 21%. This can be reduced to 15% if you fill in the appropriate paperwork. However, it is very difficult to recommend the Spanish banks right now. When the yield gets up that high, the market is telling you something. I would also be worried about JP Morgan who is currently in the process of settling with the U.S. authorities on what will be the largest fine ever imposed upon a corporation. Add to this, the reputational loss and that is some overall loss for shareholders to bear.

Next we tighten up the CADI (consecutive annual dividend increases) to be 3 years and this brings us to our short list of 5 stocks.

This leaves three UK banks who emerged from the financial crisis relatively unscathed. Close Brothers, Standard Chartered and HSBC. Additionally, we have Barclays and JP Morgan, who all meet the CADI of 3 criterion. However, we eliminated JP Morgan earlier for short term reasons.

At this point we can look at the fundamentals:

Company

Forward P/E Ratio

Dividend Cover

Annualised yield

Close Brothers

12.9

2.0

3.54%

HSBC

11.0

1.9

6.87%

Standard Chartered

10.8

2.5

5.12%

Barclays

11.2

3.9

4.25%

Close brothers were once top of the optimiser, when the share price was half what it is today, but they have rallied very strongly and now yield significantly less than the other three. They have been building their dividend cover over the past couple of years and it is now very respectable at 2. From this level we can expect that earnings increases will feed through to dividend increases proportionately.

HSBC are trading in the middle of their 52 week trading range and whilst they do not look expensive at this level, they did have a disastrous foray into sub-prime America, which they largely exited in 2009 by closing down the HSBC finance arm with the loss of 6000 jobs. There is little doubt that through the financial crisis HSBC was one of the world strongest banks in spite of the disastrous US acquisition. More recently, they had to pay a record $1.92 billion fine for money laundering of drug money in Mexico.

Barclays was much harder hit by the financial crisis, but did manage to avoid a government bailout by using Middle East investors who made a very tidy sum out of it. Additionally, they had to sell Barclays Global Investors and with it the excellent ishares business to Blackrock. In my view, this was a disaster for shareholders. ‘Credit’ has to be given for not purchasing ABN AMRO in 2007, which was more by luck than by judgement or Barclays would be in the same position as where RBS sits right now.

Standard Chartered was not hit by the financial crisis in anything like the same way as the other two larger banks and went about their business as normally as you can given what was going on. However, they were hit by the crisis in Dubai that struck in November 2009. The bank stated, eventually that the ‘impairment would not be material’. Most recently the shares took a walloping when they were accused of money laundering in Iran, but the speedy settlement of $340 million looks well manageable. However, it should be noted that investigations by the US treasury are still ongoing.

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

Close Brothers

Year

Dividend in Pence

% Growth

2006

32.5

 

2007

37.0

13.8%

2008

39.0

5.4%

2009

39.0

0%

2010

40.0

2.6%

2011

41.5

3.8%

2012

44.5

7.2%

 

HSBC

Year

Dividend in Pence

% Growth

2006

41.94p

 

2007

45.12p

7.6%

2008

38.26p

(15.2)%

2009

21.3p

(44.3)%

2010

22.6p

6.1%

2011

26.0p

15.0%

2012

29.01p

11.6%

2013 Q3 dividend declared at 6.275p goes ex dividend on 23rd October

Standard Chartered

Year

Dividend in Pence

% Growth

2006

36.31p

 

2007

39.72p

9.4%

2008

42.42p

6.8%

2009

42.79p

0.9%

2010

42.99p

0.5%

2011

47.77p

11.1%

2012

54.92p

15.0%

2013 interim dividend of 18.5p paid.

Barclays

Year

Dividend in Pence

% Growth

2006

30.19p

 

2007

34.0p

12.6%

2008

11.5p

(66.2%)

2009

2.5p

(78.3%)

2010

5.5p

120%

2011

6.0p

9.1%

2012

6.5p

8.3%

2013 Q1 & Q2 dividends of 1p paid.

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:

Company / Broker Rec

 Buy

Hold

Sell

Close Brothers Group

6

3

2

Standard Chartered

13

15

5

HSBC

17

12

3

Barclays

19

8

3

Standard Chartered, admonished last year for 'money laundering' with Iran look very good value at these levels. The scandal cost them $340 million in fines and probably quite a lot more in reputational losses. It has strong emerging markets exposure and it is recent weakness in these markets that has held back the shares. Standard Chartered are the only bank that we cover that has continued to increase its dividend throughout the whole of the financial crisis (since at least the year 2000) and for that reason is our dividend of the week. This is underpinned by the movement in dividends from 2006 to date.

Close from 32.5p in 2006 to 44.5p in 2012.

HSBC from 41.94p in 2006 to 29.01p in 2012.

Barclays from 30.19p in 2006 to 6.5p in 2012.

Standard Chartered from 36.31p to 54.92p in 2012.

Companies mentioned

This article was originally acceessible only to DividendMax members and is now publicly available.

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