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Investors Chronicle dividend of the week - 13/11/2013

Investment Tools Ltd.
Investors Chronicle dividend of the week - 13/11/2013

Investors Chronicle – Dividend of the week

This week we are going to use the DividendMax Optimizer to have a look at all of the stocks with an annualised yield of over six percent, consecutive annual dividend increases of more than five and with dividend cover greater than one. This reveals seventeen companies of which two are Spanish and one is French. This again goes to show how spoiled we are for dividends in the U.K.  Although, some American companies such as tobacco giant Altria make the cut on yield, they were eliminated on CADI with a track record of only three years of consecutive increases. Williams Companies Inc and AT&T very narrowly missed the cut with annualised yields of 5.98 and 5.95% respectively. Anyway, back to the initial criteria and we will first eliminate all of the previous dividends of the week. This is the last time that we will eliminate previous dividends of the week from our analysis as sufficient time has now elapsed for us to look again at some of our earliest choices. Next week, we will have a review of all of our past choices.

So, former dividends of the week Catlin, Admiral, Astra Zeneca, Carillion, Smiths News and Vodafone are eliminated to leave us with our long list:

Enagas, HICL Infrastructure, 3i Infrastructure, Imperial Tobacco, Eutelsat communications, Chesnara, SSE, Red Electrica, Tullett Prebon and Centrica.

As we discovered last week with 3i Infrastructure, HICL infrastructure does not seem to be covered by any brokers (3i had one broker) in spite of both companies being in the FTSE 250. HICL was formally the HSBC infrastructure company and both companies provide investors with long term investments in public infrastructure projects with solid long term stable returns. They should be given strong consideration for any income portfolio, but for dividend of the week, we are looking for companies with a higher profile, so they will not be looked at any further.

This leaves us with quite a mixed list and we can have a look at the fundamentals which have improved a little over the past week as the markets have endured several days of falls:

Company

Forward P/E Ratio

Dividend Cover

Annualised yield*

Enagas

11.5

1.5

8.13%

Imperial Tobacco

10.9

1.9

7.50%

Eutelsat communications

15.5

1.6

7.26%

Chesnara

13.1

1.3

7.10%

SSE

11.8

1.4

6.95%

Red Electrica

12.3

1.5

6.62%

Tullett Prebon

7.9

2.3

6.58%

Centrica

12.6

1.7

6.12%

*over 3 dividends

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

Company / Broker Rec

 Buy

Hold

Sell

Enagas

9

7

3

Imperial Tobacco

7

12

2

Eutelsat

10

8

1

Chesnara

2

0

0

SSE

7

4

5

Red Electrica

8

6

5

Tullett Prebon

2

8

1

Centrica

3

9

5

There are four utilities in the list of eight above and we only want to take one of them through to the shortlist. Red Electrica and SSE battle it out amongst the electricity companies and they both look very similar on fundamentals, so it really comes down to whether or not you want direct exposure to Spain and the Euro. Enagas and Centrica battle it out amongst the predominantly gas based companies and the same arguments apply, but you have to say that Enagas looks better value on fundamentals than Centrica and this is backed up by the brokers recommendations with Enagas having far more fans than Centrica.

As a result of a reader’s request, we have promised to mention the Spanish withholding tax, which stands at 21%. Specifically, the reader wanted to know how to reclaim the tax withheld. Unfortunately, this is not a straightforward process. The UK has signed over 100 double taxation arrangements and one of these is with Spain. As we have a French company in the list, it is worth mentioning that the UK has a similar arrangement with France which deducts 25% at source. Unfortunately, the method of claiming back the tax varies from jurisdiction to jurisdiction. The only company that I can find that appear to specialise in the refund of withholding tax is a firm on the internet called Taxback.com. I asked our chairman what happened to his foreign dividends and he told me that his wealth manager took care of it all for him; so if you are sufficiently wealthy to be looked after by a leading wealth manager, then it will probably be part of their service. It is annoying that most of the brokers do not seem to offer this as a service to clients. I am afraid, that is all that I have to offer on withholding tax other than to say that the amount withheld by governments is in the order of $300 billion and only 7% of what can be reclaimed actually is reclaimed. From what I can gather the process is quite laborious and is only really worthwhile if the amounts being reclaimed are substantial as the cost of recovering small amounts is prohibitive. It should be noted that there is a UK withholding tax of 10% on dividends, but in the UK companies declare their dividends net of withholding tax so the investor tends not to notice it.

For the purpose of this analysis we are going to ignore withholding tax and use the gross yield and for that reason we will take Enagas through to the shortlist.

Looking at the remaining stocks, we have discussed Tullett Prebon in previous dividends of the week and we felt that scope for dividend growth was limited and that there were still fundamental problems within the stockbroking industry. Chesnara has long been a favourite of ours, but we feel that it has done too much in rising from 176p to 302p over the past 12 months.

Eutelsat go ex-dividend on the 18th November with the dividend payable on the 21st November. They are paying euro 1.08 per share for a fairly hefty 4.5% return from this one dividend. (less withholding tax of course). As always, check with your broker that the ex-dividend date is correct and that you will qualify for the dividend.

Imperial recently declared their final dividend of 81.2p going ex-dividend on 15th January.

So, our final three stocks are Enagas, Eutelsat and Imperial Tobacco.

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

Enagas

Year

Dividend in euro cents

% Growth

2006

47.1

 

2007

59.8

27.0%

2008

65.1

8.9%

2009

74.9

15.1%

2010

83.8

11.9%

2011

99.3

18.5%

2012

111.3

12.1%

Their next dividend is due in December and is not yet declared

Eutelsat

Year

Dividend in euro cents

% Growth

2006

54.0

 

2007

58.0

25.0%

2008

60.0

5.5%

2009

66.0

3.4%

2010

76.0

16.7%

2011

90.0

28.6%

2012

100.0

27.8%

2013

108.0*

8.0%

*recently declared and going ex on 18th November

Imperial Tobacco

Year

Dividend in Pence

% Growth

2006

53.9p

 

2007

60.4p

12.1%

2008

63.1p

4.5%

2009

73.0p

15.7%

2010

84.3p

15.5%

2011

95.0p

12.7%

2012

105.6p

11.2%

2013

116.4p*

10.2%

* Imperial recently declared their final dividend of 81.2p going ex-dividend on 15th January. This is included in the 116.4p for 2013.

In each of the three cases above, the companies have doubled their dividends over the timeframe from 2006 – 2012/13. That is good enough for most investors and of course it gives us a difficult call to make. On the fundamentals, Eutelsat look expensive compared to both Imperial and Enagas, especially in the light of the fact that brokers are predicting flat earnings growth this year and for that reason are eliminated. The prospect of picking up two dividends of around 4.5% in just over one year is tempting, but again, this is only the case if you reclaim the withholding tax, otherwise the yield falls to approximately 3.4%.

In the case of Enagas, the yield and track record are very good and brokers are forecasting continued growth in both earnings and dividends and its track record certainly stands up to the UK utilities. However, it can only match Imperial Tobacco and the decision will rest with the investor and their attitude towards the Euro and in particular, Spain.

Imperial Tobacco has featured in so many dividends of the week and has so often been pipped at the post, but not this week. It has a stated dividend policy of increasing its dividend by at least 10% and has largely missed out on the stock market rally of the past 15 months as investors have shunned defensive stocks in favour of more glamorous companies. The share price stands at 2370p which is in the middle of its 12 month trading range. It is 57p below where it was this time last year and yet earnings and dividends have increased. Given that the market is high, investors should be looking at those stocks that have ‘missed the boat’ yet still have solid growth prospects and more importantly are defensive. For that reason, Imperial tobacco is our dividend of the week.

Companies mentioned

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

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