Investors Chronicle dividend of the week - 23/09/2013

Investors Chronicle – Dividend of the week

This week our theme is going to be ‘ultra safe’ dividends amongst fairly large cap companies.

This week we are going to look again at large capitalisation stocks in the U.K. Our initial criteria is for an annualised yield over three dividends of greater than 4%, a market capitalisation greater than two billion pounds, dividend cover greater than one and with a CADI (consecutive annual dividend increases) of greater than five. Additionally the company must be expected to increase the dividend in each of the next 3 sets of results. This throws up 24 companies using the DividendMax tools.

The reason that we are convinced that the dividends of our selection will be ‘ultra safe’ is that our final criterion is that, on top of our initial criteria, the company must also be undertaking share buybacks (at any time during the 2013 calendar year), which is a filter not currently available in DividendMax. The remaining companies will form our long list. We will then go on to look at other factors to reach our shortlist.

Firstly, we will exclude Admiral, Vodafone, British Sky Broadcasting and BHP Billiton as they have already been dividend of the week in recent times.

The long list is Imperial Tobacco, GlaxoSmithkline, BAE systems, Morrisons Supermarkets, Centrica and Amec.

All of these companies have bought back their own shares during 2013 and have tremendous track records of paying ever increasing dividends. To get the list down to the final four, we are going to pick out the four stocks with the best dividend track records.

Imperial Tobacco stretches back to at least 1997.

BAE systems stretches back to 2003.

GlaxoSmithkline Stretches back to at least the mid 1980’s.

Morrisons Supermarkets back to 2005/6.

Centrica stretches back throughout its history.

Amec to at least 1997.

On the basis of longevity of the payout, the two companies that fall by the wayside are Morrisons, who only held their payout in 2005/6 and BAE systems who did likewise in 2003. The four winners are Amec, Imperial Tobacco, GlaxoSmithkline and Centrica.

Looking at the fundamentals we have:

As always, at this stage, elimination becomes very difficult indeed and in this analysis, on the fundamentals, for my money, Centrica look just a little expensive compared to the rest. No doubt that they will crop up in the future, possibly if the share price has a wobble. At this point in time they are trading just a penny shy of their all-time high and they go ex-dividend on Wednesday 25^th September. The other three stocks have retreated from recent highs with Amec at 1110p (1172p high), GlaxoSmithKline at 1577p (1782p high) and Imperial at 2303p (2534p high)

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

Imperial Tobacco

2013 Interim 35.2p (paid)

GlaxoSmithKline

2013 Q1 18p, Q2, 18p (declared, goes ex on 7^th August)

Amec

2013 Interim dividend of 13.5p (declared and goes ex-dividend on 27^th November)

Imperial Tobacco is probably the safest in terms of the predictability of the dividends and analysts are currently pencilling in around about 10% growth in the dividend this year. This has already been met at the interim stage with an 11.1% increase. The shares have had a good little run recently after hitting a low for the year 0f 2120p on August 27^th.

In their recent half yearly report they stated that they expected to grow earnings per share at the lower end of their earnings model, which aims to grow earnings by 4-8% per annum before the beneficial effect of share buybacks. Again, in the results, they reiterated their stated dividend policy of aiming to grow the dividend by at least 10% per annum ‘over the medium term’ At the interim stage they had spent £295 million acquiring 12.3 million shares as part of their annualised £500 million share buyback programme.

They carry a ‘healthy’ level of net debt at around £11.2 billion and have interest cover of 5.4x.

GlaxoSmithKline are a dividend paying monster, having increased the dividend for a very long time. Their dividend increases follow a fairly set formula that does need adjusting every now and then or shareholders will face ever shrinking percentage dividend increases. The last adjustment was in 2011 when the final of the four quarterly dividends was increased by more than the usual. Another one is due soon and could happen this year with the final increasing to 24p instead of the expected 23p.

The Q2 results in July delivered the very predictable dividend of 18p and confirmed the total share repurchases for 2013 of between £1billion & £2 billion. Like Imperial, GlaxoSmithKline carries a ‘healthy’ net debt of £15.7 billion. Trying to get to the bottom of the financial position is a nightmare with all of the multinationals with incredible complexities in terms of tax, interest, intercompany transfers, etc, etc.

Amec has an incredible track record of increasing dividends to shareholders that exceeds both GlaxoSmithKline’s and Imperial Tobacco’s and yet is hardly considered by anybody to be a dividend Champion. But it is! In its recent statement re Kentz Corporation, where it stated that it had ‘no intention to make an offer for Kentz’, they also stated ‘The pipeline of opportunities remains strong, and depending on the progress of acquisitions, additional cash returns to shareholders will be considered in the fourth quarter of 2013’

The interim dividend was increased by 15% and we can expect at least the same at the final stage, again way ahead of GlaxoSmithKline and a few percentage points ahead of Imperial.

The share buyback programme of £400 million completed on 8^th February 2013.

Given the dividend increases of the past 5 years of 96% for Imperial, 54% for GlaxoSmithKline and 200% for Amec and also given the future prospects for dividend increases, Amec just pips Imperial Tobacco at the post and is our dividend of the week.

Carrying debt / leverage

There is a consensus amongst analysts / commentators that there is a healthy level of debt and whilst I accept this, I think you always have to be aware that debt has to be either repaid or refinanced. Cheap money will not last forever and the trend of companies borrowing to facilitate shareholder returns could bite a lot of companies in the bum!

Market pressure from the so called experts

Related to the above, I think it is important to recognise how much company executives are influenced by current market thought / trends. The ultimate example of this that has occurred in my lifetime is the total decimation of investors in GEC, who were pressured by the market and analysts to make a series of internet related disaster purchases that brought the once mighty company to its knees. Spend your cash! They had an enormous cash pile and spent ridiculous sums of money on US acquisitions and Lord Weinstein’s life’s work evaporated in short order. 

For Amec, we are estimating the next three dividends to be 13.5p, 28.5p and 15.4p. They are at 1107p at Fridays close. At 1107p, this will generate a return of 4.40% annualised over a 16 month period.

Amec yield calculation:

13.5 (declared) + 28.5 + 15.4 = 57.4p between now and 26/11/2014 (approximate ex-dividend date of the third dividend)

Ergo 57.4p / 1107 = 5.18% 5.18% annualised = (5.18x365) / 429* = 4.40%

*Number of days until theoretical ex-dividend of the third dividend.