Our latest research 14/2/2014

DividendMax write up 14/2/2014

(John) Wood Group PLC

Today we are going to look in the Optimizer at the entire database. The initial criterion is for a CADI (consecutive annual dividend increases) of greater than 5 years. This throws up well over 100 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 still large 38 companies. An annualised 3 dividend yield of over 3% and dividend cover greater than 2 brings the list down to 15 stocks including Amec, Serco, Micro Focus International, Galliford Try, Hiscox, Prudential, Hunting, Dialight, Bunzl, Spirax-Sarco, WH Smith, Booker, Aberdeen Asset Management, Wood Group and RPS Group

Looking at the fundamentals we have:

Looking at the list we like Amec, Aberdeen Asset Management, Galliford Try, Hunting, RPS Group and Wood Group on valuation grounds and for that reason we will take a further look by seeing what the brokers are saying about them.

We are going to go with the brokers strong views on RPS Group and John Wood Group with no sell recommendations. The final choice is tough, but we like Aberdeen Asset Management in view of our increasingly bullish stance on the market.

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

Wood Group

*We are estimating a final dividend of 8.96p

Aberdeen Asset Management

RPS Group

*We are estimating a final dividend of 3.84p

Three remarkable track records and none of these companies could be described as expensive. RPS dividends are up 166% during the period, Aberdeen Asset Management by 264% and John Wood by an incredible 333%.

Aberdeen Asset Management has had a great few years, 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. They can have erratic earnings. Their recent price history shows a high of 500p and they currently trade at 400p and they are not too far above their 52 week low of 348p. Expect another decent year, but we don’t expect dividend increases to match the recent levels.

RPS Group has an amazing track record. They are well off their 52 week high of 360p and currently sit at 315p. They were our investors chronicle dividend of the week back in July when they were 220p. They are the second highest yielder of the three with an annualised yield over three dividends of 3.43% compared to Aberdeen’s 5.27% and Wood Groups 3.24%. RPS has increased its dividend by 15% every year for the last 20 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.

Wood Group is currently trading at 672p, well below its 12 month high of 915p. It does have the lowest yield of the three but as was pointed out by Goldman Sachs recently the company’s strong positioning in the market is not reflected in its current valuation. The company warned in December of a weaker outlook for its engineering business. Nonetheless, we believe that there is considerable scope for continued good dividend increases as the company has very high dividend cover and strong cash flows.

It is a very close call between the three stocks, but for its lower P.E and the very real chance of a re-rating, we pick Wood Group as our choice this time. Aberdeen is attractive for their superior yield and we think it is very interesting at 400p. RPS has probably done too much since July when we highlighted its attractions, but is always one to watch for its incredible consistency.

We are estimating the next three dividends to be 8.96p, 5.22p and 10.75p. They are at 672p at Thursday's close. At 672p, this will generate a return of 3.24% annualised over a 14 month period. Their Final results are this coming Tuesday 18^th February. The analysts’ range is for revenue between $6897m and $7386m ($6821 last year) with pre-tax profits coming in between $407m and $439m ($336m last year)

Wood group yield calculation:

8.96 + 5.22 + 10.75 = 24.93p between now and 8/4/2015 (approximate ex-dividend date of the third dividend)

Ergo 24.93p / 672 = 3.71% 3.71% annualised = (3.71x365) / 418* = 3.24%

*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.