Our latest Research - 16/09/2014

DividendMax write up 16/9/2014

This time we are going to take a look at the top of the Optimizer as we have not done this for a while. This means another look at the insurance industry which is the highest yielding sector in the market. But there are others including the supermarkets and special situations like Raven Russia. Our initial criteria are for all yield, all market cap, all dividend cover, any CADI and a positive FDI. The selection yields hundreds of companies, but we are only going to analyse the top 10. Being at the top of the Optimizer often implies a dividend cut is around the corner but this is not necessarily going to be the case. We have seen some companies cut such as RSA and some reduce such as Aviva. Others, such as Admiral defy the critics each year with pretty good increases, but even they look under real pressure this time and a small reduction is now looking a real possibility.

The insurance sector has come under severe pressure in recent times. The empowering move by the government over pensions will hit the lucrative business of providing annuities. Meanwhile underwriters and motor insurance firms have been hit by floods and heavy competition respectively. That is why so many insurers are offering such high yields. So it is a bit of a surprise to see so few in the current top 10. Anyway, here is the list:

Hansard Global, Raven Russia, GVC Holdings, Brit Plc, Ladbrokes, Morrisons Supermarkets, Berkeley Group Holdings, Antofagasta, eSure and Primary Health Properties.

Now that we have the full list covered by DividendMax, we should look at whittling it down and in our view the most important criteria here will be the CADI so we will look for consistency of dividend payments by selecting a CADI greater than 4 years. This reduces the list to Raven Russia, Morrisons Supermarkets, Antofagasta and Primary Health Properties. We add to the list eSure and Brit plc as they have both only recently joined the market and so it would be unfair to punish them on CADI grounds. Admiral would have made the list but it went ex-dividend last Wednesday taking it out of the top 10.

Looking at the fundamentals of the remaining companies we have:

We are going to eliminate Primary Health on the grounds that dividend is not covered by earnings and the P/E is very high. Raven Russia is interesting now that they have fallen today as an arbitrage opportunity has emerged, albeit a small one. They are tendering to buy back your stock at 75p in cash on a 1 for 30 basis. You can opt to sell your entire holding, but you may be scaled back. Half a penny goes on the stamp duty and there are the dealing costs to consider but after recent falls it is worth looking at whilst they can be bought for 70p.

Morrisons reported their numbers on Thursday and produced a 5% dividend increase. It really is very difficult to be too negative here. In our opinion, they represent great value.

Antofagasta. This company is not overvalued. Its market cap is $7.5 billion and it is expected to make a pre-tax profit of around $1.9 billion. It actually has a really good track record of increasing its ordinary dividend. It has paid out 30-odd % of its current market capitalisation in dividends in the past 4 years.

eSure does not have a long track record having only floated in recent times, but in spite of starting from a very high yield, it has already doubled its interim dividend of last year. It also doubled its special dividend from the same period last year.

Brit PLC is expected to pay a final dividend of 12.5p as per its prospectus on flotation.

We always say that anything yielding around 10% on the Optimizer is a buy unless there is a strong prospect of a reduction in the dividend. Here is what the brokers think:

I cannot find any broker recommendations for Raven Russia, but it is interesting to note that Neil Woodford, formally of Investec/Perpesco, who is regarded as the foremost income investor in the U.K over the past years has already taken a large stake for his new Woodford fund, having been a large shareholder whilst still at Invesco.

Brit sails through on the back of the brokers views, as does eSure. Raven Russia gets the nod after recent falls and the arb situation. I cannot rule out Antofagasta or Morrsons.

Firstly, lets remind ourselves of the dividend histories of our five survivors. Let’s have a look at the dividends paid by each company over the past 8/9 years:

Raven Russia

*they have declared an interim dividend of 2.5p for H1 2014 and you have to elect by 30^th September 2014.

eSure

They have recently gone ex-dividend for a 3.6p interim and a 1.5p special for 2014 on the 3^rd September.

Brit plc

*This is estimated based upon their prospectus when entering the market.

Morrisons

They have declared an interim dividend of 4.03p going ex-dividend on 1^st October.

Antofagasta

There were specials in 2010 (100p), 2011 (24p), and 2012 (51.22p) The interim dividend for 2014 is declared at 7.05p and goes ex on 17^th September. The huge jump in 2013 relates to a change of dividend policy whereby the company pays an interim and a final and no longer pays out special dividends.

It is very difficult to choose between them, but In spite of the safe arbitrage, Raven Russia could be hit if tensions with Russia continue to escalate. Antofagasta depends upon your view of the world economy. If you are bullish, then they look really excellent value. We covered the supermarkets quite recently and preferred Sainsbury’s to Morrisons. eSure have recently gone ex-dividend, but we like them a lot. So we are going to go for relative newcomer, Brit plc, which declared its maiden dividend of 6.25p and is expected to pay a further 12.5p in the 2014 financial year. It sits at a P/E discount to its peers and has the highest yield.

Brit plc yield calculation:

12.5 + 6.75 + 13.5 = 32.75p between now and 17/2/2016 (approximate ex-dividend date of the third dividend)

Ergo 32.75p / 246 = 13.31% 13.31% annualised = (13.31x365) / 519* = 9.36%

*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.