Our latest research 15/07/2015

5 growth stocks with good track records and good dividend cover.

Today we are looking for our 5 stocks to pick for the run to the end of the year. We will use the DividendMax tools to look for growth in the dividend, solidity of future payments and a recent history of past payments.

We are only going to look in the UK markets so the region is left at United Kingdom.

To start with we will use the Optimizer to select all of those stocks with a dividend cover of 2 or more. This will give us protection from a cut in the dividend. Go into ‘show details’ and set Divi Cover to more than 2, CADI to any, FDI to any and market cap to all.

This reveals a long list of companies and so we initiate our second criteria which is for a forecast dividend increase. Initially, we will be optimistic and start with a forecast dividend increase of over 20% which reveals a fairly long list but a brief sweep down the CADI column reveals that most do not have the track record that we will be looking for. For that reason we will reduce our growth target to 10%. This presents us with a much more diverse spread from which to select our stocks.

We now look to the dividend track record and we are not going to select the highest level but we will go with a consecutive annual dividend growth of 4 years.

This gives us our initial list of 28 stocks and we will be looking to get this down to 5 stocks. We do not want anything in the same sector and we do not want stocks that we have raved about before.

We have been strong advocates of Bellway and we still rate it extremely highly, but we will eliminate it here. The same goes for Easyjet, Next and ITV, all of whom we still rate very highly, but we do not want to be repeating ourselves.

We have a range of yields throughout our list which is surprising given that they all meet the criteria. We are only going to pick one company from the 2% - 3% yield range. It is interesting to note that quite a few of these lower yielding stocks pay regular special dividends.

Looking at lower yields in the list. Just above Next and ITV sits Spirax-Sarco who we like, but we think that they will be one for next year when we reckon another one of their big Special dividends will come. Rentokil are on the comeback trail, but we do not feel that the yield is good enough compared to some of those that are higher in the list. All of the remaining companies are in very good shape and we like most of them including Betfair, Intercontinental Hotels, Savills and SIG, but the company that we are going to go for in the 2-3% yield range is Ashtead. It has grown its dividend from 1.5p in 2006 to 15.25p last year and the past three years has seen dividend growth of 114.3%, 53.3% and 32.6%. The final dividend of 12.25p is up for grabs and goes ex-dividend on the 13^th August. If earnings forecast are correct, they are trading on a modest forward P/E of 13.6x, which is too low for their track record. At 1065p they sit in the middle of their trading range which is 869p to 1217p. Most importantly, their dividend cover is a very very safe 4.4x, which points to further above average dividend increases in the coming years. Out of 16 brokers, 13 say strong buy and nobody says sell.

In the 3% – 4% yield range we particularly like the Paragon Group of Companies and Dunelm. Paragon have been rebuilding their dividend since the financial crisis and this looks set to continue. Dunelm have increased their dividend from 3.8p in 2007 to 20p in 2014 with a further rise in 2015 to 23.5p expected. They paid a very big Special dividend of 70p back in March, but they do sit on a pretty high PE. For that reason, we are going to go for Paragon who increased by 20% at the interim stage and we think will increase by a similar amount at the finals. Again, they are sitting roughly in the middle of their trading range of 318p to 456p at a current price of 389p. Out of 13 brokers, 10 say strong buy with just one who says sell. They are buying back their own shares. They are on a very reasonable PE of 11.3x and have forward dividend cover of 3.2x.

In the 4 – 5% yield group, we like Bellway and Easyjet, but have already blown their trumpet. We like the look of Telco giant BT Group, Bovis Homes and John Wood group. We prefer Bellway to Bovis Homes and John Wood will have a lesser year due to the oil and gas markets. It is difficult to predict when this will end and although they have good cover, we are going to go with safety first as the yields are rising with this group of companies and select BT Group where the final dividend of 8.5p is up for grabs if bought before the 8^th August.

We will select two companies from the rest and our first choice is Galliford Try. Its track record is very impressive indeed with dividends rising from 2.5p in 2006 to 53p in 2014. They have already paid a dividend of 22p at the 2015 interim stage which was a rise of almost 47% on the prior year. Expect another big increase with the final results on the 16^th September. Their recent trading statement was very encouraging where they expect ‘record full year results with profit before tax towards the upper end of analysts’ range’. They are well up on the year, but the fundamentals support this and the yield is good.

Our final selection comes from stocks requested by members. RPS group, like Wood Group is struggling with the Oil and Gas industry woes and their proud track record of 15% dividend increases every year for over 25 years could come under pressure if things do not pick up soon. Cover is still sufficient for this year however. Which leaves three selections from members; Plastics Capital, Communisis and 32 Red. I am struggling with this as they are all tiny companies compared to our selections thus far. Let’s do a comparison table and go with the results of that:

I cannot find anything wrong with any of them and they all met our reasonably stringent selection criteria. The recent trading statement from communisis did not give a lot away, but the extension of the contract with EE was good and they have obviously suffered from currency headwinds as they stressed their performance on a CC basis. Plastics Capital issued a very positive statement with its recent final results and delivered a 33.3% dividend increase.

All three have dividends coming up in theory, but only Plastics Capital has declared.

32Red has made a recent acquisition for a consideration of cash and shares with the consideration shares subject to a 12 month lock in. Their track record is good in what is a very competitive, but very profitable industry.

It is difficult to choose between the three but I am going to plump with the old adage that a bird in the hand is worth two in the bush and go with Plastics capital. The yield is higher, the business is looking good and the dividend is declared at 2.67p going ex on the 6^th August. They are trading at the lower end of their 52 week range. The one broker that follows them says strong buy, but that is bound to be their own broker so don’t read too much into that.