Dividend of the week - First Group

DividendMax Ltd.

Dividend of the week - First Group

Each week I will be posting my dividend of the week. Initially I will focus on the U.K. DividendMax does cover European and U.S equities so they will pop up from time to time. In week one, I am simply going to choose the stock that sits at the top of our optimizer and that is First Group.

First Group has a stated dividend policy of uplifting its annual dividend payment by 7%. It has just declared the Interim at 7.62p and this goes ex on the 9th January 2013. The final dividend will be set when the U.K. rail situation becomes clearer. Below is a quote from the recent interim statement.

As a result of this uncertainty, the Board has decided to hold the interim dividend at last years level, and will consider the appropriate level for the full year dividend in May 2013, by which time the prospects for our rail division are expected to be clearer.

First Group has a very good track record of increasing its dividend every year and this goes back to its flotation on the stock market in 1995.

Recently, the share price has tanked after the Government overturned the decision to award First Group the West Coast franchise ahead of Virgin. I am of the view that they were overpaying for that franchise and that losing it and being reimbursed by the government for the costs of the bid is not a bad thing.

However, the problems surrounding the competition for future rail franchises has cast a shadow over the group.

First Group is a big company with a turnover of over 6.5 billion and 124,000 employees. The market capitalisation is only 900 million. Even taking account of the cuts in analysts forecasts, it trades on a forward P/E of 6.1 to March 2013 and 5.4 to March 2014.

The share price peaked at over 8 towards the end of 2008 and sits at just 188p today.

First Group has an excellent and experienced management team and we have to expect that the government will sort out the rail bidding process sooner rather than later.

Although markets dislike the uncertainty that has been created by the department of transport, we know that First Group will remain a major player in this important market. There is a lot of doom built into the share price and this looks good for the contrarian investor at these levels. (182 pence)

Companies mentioned

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