Investors Chronicle dividend of the week - 04/11/2013

Investors Chronicle – Dividend of the week

A look at the top of the DividendMax optimizer reveals a number of companies not yet covered by dividend of the week. This week it comes from the financial services industry. It would be very easy to pick out Catlin or Resolution Ltd with the promise of very decent dividends. We are going to stick with a closely related industry and look at the financial services and general financials sectors. We will exclude preference shares in this analysis and the sector throws up twenty three companies, which we can list:

Ashmore group, MAN Group, Hargreaves Lansdown, ICAP, 3i Infrastructure, Tullett Prebon, Intermediate Capital Group, Aberdeen Asset Management, International Public Partnerships, Provident Financial Group, Investec, IG Group Holdings, Henderson Group, S&U, Paragon Group of companies. Rathbone brothers, Aberforth Smaller companies Trust, Jupiter Fund Management, 3i Group, Schroders, London Stock Exchange and International Personal Finance.

In order to reduce the list, we are going to look at the largest companies and select a market cap of over £1 billion and an annualised yield of over 3%, which brings us down to a more manageable ten companies:

Ashmore group, ICAP, 3i Infrastructure, Intermediate Capital Group, Aberdeen Asset Management, Provident Financial Group, Investec, IG Group Holdings, Henderson Group & Jupiter Fund Management.

These are the sorts of companies that will feel collateral benefit from the Quantitative Easing exercise. The general rebuilding of the banks and the consequent rise in the stock market that has already happened due to QE will rub off on all of these firms. Counterparty risk is reduced, thereby improving the climate in which these companies operate.

Let’s have a look at the fundamentals which will hopefully point us to a good value play at a time in the markets when finding value is becoming increasingly difficult with the relentless surge in the indices:

The table below represents the number of brokers in each of the recommendations categories of buy / hold / sell:

There are 5 fund managers in the list of 10 above and we only want to take one of them through to the shortlist. That choice is made easy by the superior record of Aberdeen Asset Management compared to its peers, none of whom have a CADI (consecutive annual dividend increases) of more than 5. Aberdeen does and it stretches back to 2005 and they managed increases, albeit small in both 2008 and 2009, when many others could not. Ashmore held its dividend in 2008; Henderson held in 2008 and 2009; Investec reduced its dividend in 2009; Jupiter started paying dividends in 2010 and is building up a nice track record, but is some way off that of Aberdeen right now. Ashmore currently has the highest annualised yield at 7.2% as it is going ex-dividend this week for 11.75p and there are two finals and an interim in the equation.

So that sorts out the fund managers and leaves us with ICAP, 3i infrastructure, Provident Financial, who went ex-dividend last week and will not be considered for that reason; Intermediate Capital Group and IG Group holdings. Intermediate Capital group almost halved their dividend in 2011 and do not make the cut for that reason. 3i Infrastructure is an excellent dividend paying stock with a good yield and with steady if unspectacular dividend increases of between 3.8% and 9.3% over the past 5 years. Astonishing that it is only covered by 1 broker. ICAP had a very good track record up until this year when it could only hold its dividend at the previous year’s level. However, for its excellent management and recovery potential, we are going to take ICAP through to the shortlist along with IG Group who also have a strong management team and are the undisputed leaders in their field.

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

ICAP

Aberdeen Asset Management

2013 interim dividend of 6p paid.

IG Group Holdings

On the fundamentals, IG Group look expensive compared to both ICAP and Aberdeen Asset Management with a higher P/E and lower yield than both of them and so they will be eliminated at this stage.

Aberdeen Asset management is definitely having a great time right now, but some are nervous of financial service companies as new regulations come in and the amounts they are charging come under scrutiny. It is also a worry when the analyst’s consensus is so universally consistent with almost all analysts rating it a strong buy. Their recent price history shows a high of 492p and they currently trade at 448p. We featured them in our first ever dividend of the week back in July and whilst we do expect a large increase in the final dividend, we feel that the shares are high enough.

So we are going to go for a company that has slipped under the radar somewhat. It has a superb track record of increasing dividends and has increased the dividend by 80% from 2007 – 2012.

It has increased its dividend every year since 2001 and is forecast to continue this trend with further increases pencilled in by analysts for 2014 and 2015. The dividend has increased by 450% during this timeframe from 4p in 2001 to 22p in 2012. It was held at 22p in 2013. The dividend is forecast to increase by around 7% this year and next. Dividend cover is respectable at 1.5x.

The balance sheet is strong, with relatively low borrowing and plenty of cash on the balance sheet. Free cash flow is strong. The company has also delivered £80 million of P&L cost savings in the coming year. Unfortunately, the company was fined £54 million for fixing Libor rates and it can be expected that further fines will follow in respect of Yen Libor from the US department of justice.

Commenting on ICAP’s recent final results Michael Spencer said:

"This has been an extraordinarily tough year in the wholesale financial markets. Trading activity across all asset classes was negatively affected by a combination of cyclical and structural factors including the depressed global economy, a low interest rate environment and lack of clarity around some aspects of regulatory reform. ICAP's financial performance reflects these extremely challenging conditions.

"Despite the current climate, we're keeping our focus on the long term, delivering on our strategic goals and priorities. We're investing, innovating and adapting the business to ensure it will thrive in the new financial landscape that is being shaped by profound regulatory changes. Wholesale financial markets are vital to the global economy and ICAP plays a critical role in increasing the transparency and efficiency of the markets and reducing risk.

"ICAP continues to benefit from its diversified business and global reach. Our electronic, post trade risk and information businesses now contribute 66% of operating profit. We have deepened our relationships and aligned our interests with our customers by partnering with them in i-Swap and Traiana.

"We have exceeded our annualised cost savings target by £20 million, resulting in expected annualised run-rate savings of £80 million and a more flexible cost base going forward. ICAP remains a profitable and a very cash generative business with a strong balance sheet. Today we are a more efficient and collaborative business than we were a year ago and this will stand us in good stead for the future."

Whilst this does not make happy reading, it is in the past and if the current optimism in the stock market is to be believed, this could well mark a bottom in ICAP’s business cycle.

The share price is currently a fair way from last year’s high of 431.5p and currently stands at 382p. The shares were almost double the current level at over 700p 5 years ago. There is little doubt that ICAP will be a major play on financial market recovery and whilst I do not expect them to be firing on all cylinders this year, the medium to long term picture is in our view strong. The Price earnings ratio is relatively low and the yield is already high. Our dividend of the week is ICAP.