Investors Chronicle dividend of the week - 27/08/2013

Investors Chronicle – Dividend of the week

This week we are going to concentrate on the U.K. and focus on the top fifteen stocks on the Optimiser as of the close of play last Friday. We do not need to apply any filtering criteria. We will just simply list out the highest yielding stocks on a 3 dividend basis and this will form our long list.

The list is, in yield order:

Admiral, Chesnara, Centaur Media, Resolution, Raven Russia, Carillion, Catlin, John Laing Infrastructure Fund, Kier Group, Bloomsbury publishing, Balfour Beatty, IG Group, Imperial Tobacco, Astra Zeneca and Ashmore Group.

We can immediately eliminate Admiral and Catlin as they have already been dividend of the week.

Because of the high yielding nature of the initial list we are going to focus on the historic quality of the payout and select only those companies that have paid consecutive annual dividend increases for the past five years.

This eliminates Centaur Media, Resolution, Raven Russia, John Laing Infrastructure fund, Kier group, Balfour Beatty, and Ashmore Group.

The remaining companies are Chesnara, Carillion, Bloomsbury Publishing, IG Group Holdings, Imperial Tobacco and Astra Zeneca.

At this point we can look at the fundamentals:

Chesnara are due to report their interim results on the 30^th August. Their recent share price history shows a high of 270p and they currently trade at 260p, with a 52 week low of 176p. Although, we think the dividend is safe, there was a considerable weakening of performance in the first quarter due to weak bond yields and a marked deterioration in net cash generation. As with much of the insurance sector, the shares have seen a strong rise in the past 12 months and we would steer clear for now.

Carillion announced its first half results last week and increased the dividend by 2%. They have a very strong pipeline and expect a better second half performance. The shares trade on a lowly PE and downside is limited by this and the strong dividend, which is well covered. Their recent share price history shows a high of 332p and they currently trade at 289p, with a 52 week low of 245p.

We have discussed Astra Zeneca in previous dividends of the week and we still take the view that the best approach is to wait and see how the drugs pipeline develops over the next year or so. The market has already priced in some future success. Their recent share price history shows a high of 3521p and they currently trade at 3246p, with a 52 week low of 2792p.

Imperial Tobacco has recently paid their interim dividend and look set to grow their dividend by about 10% this year. They remain a solid and dependable income play. Their recent share price history shows a high of 2534p and they currently trade at 2154p, with a 52 week low of 2128p.

Bloomsbury Publishing look set for a good year in 2013 and still trades on a relatively undemanding PE of 10.9x. They go ex-dividend this coming Wednesday for 4.56p. Their recent share price history shows a high of 146p and they currently trade at 142p, with a 52 week low of 102p.  

IG Group is operating in tough times for their sector. Their CEO, Tim Howkins recently sold about £5.5 million of shares. In contrast the finance director bought approximately £200, 000 of stock at 572.25p. Earnings are set to be flat this year and on a PE of 14.7, they look expensive. The final dividend is declared at 17.5p, going ex on September 18^th. Their recent share price history shows a high of 613p and they currently trade at 563p, with a 52 week low of 416p.

What are the brokers saying about the six survivors? The table below represents the number of brokers in each of the recommendations categories of buy / hold / sell:

We are going to eliminate Astra Zeneca and Chesnara for the reasons stated earlier. We are also not particular comfortable with IG group on a PE of almost 15x and in spite of the strong support from the brokers, we are going to eliminate them from this analysis. This leaves us with our shortlist of three stocks. Let’s have a look at their recent dividend histories:

Bloomsbury Publishing

Carillion

Imperial Tobacco

We expect that all three companies will continue to increase their dividends

As with previous dividends of the week, we are left with a difficult choice, but looking at the fundamentals and given their very strong order book and the near completion of the descaling of their construction business, Carillion look set for growth over the coming years and a moderate re-rating would lead to a strong share price performance. The yield will underpin the share price and downside looks very limited.

Imperial are very solid and will continue to grow. They are a defensive stock and are near the bottom of their trading range as investors have moved away from the defensives. They look very good value at the current share price and there is nothing wrong with a defensive stock that grows at the rate Imperial have managed over the years since demerging from Hansen.

Bloomsbury Publishing, who published the Harry Potter series has safely negotiated the move from physical books to eBooks and looks set to grow its business into the new world of publishing by exploiting global opportunities including the widening use of the English language and the appetite for eBooks as the hardware for such material increases in quality and quantity. Bloomsbury has come through the difficulties posed by the internet and the ebook challenge and has embraced new technology positively. It has approximately 13% of its market Cap in cash and has been making acquisitions of prestigious titles over the years, one example being Wisden, the cricketers Almanack.

Although, it clearly faces further challenges, Bloomsbury has used the Harry Potter money wisely to build a diversified publishing group and embrace new trends. It has a strong balance sheet and some interesting new titles due in the current year.

A tough choice indeed and investors could do well in any of the final three stocks, but we believe that the very strong order book and the completion of the rescaling of the UK construction business makes Carillion look attractive, especially on a P/E of under 8 and so is our dividend of the week.