Our latest Research 11/04/2016

After a long layoff due to our focus of increasing the UK coverage in DividendMax, we are going to trawl our enlarged database to produce a list of companies that we believe represents good value from an income perspective. It is interesting to note that four companies that make the cut are as a result of our strategy to enlarge our database namely Northgate, Alumasc, Arrow global and Utilitywise.

Our initial criteria is to select all of those companies with dividend cover of greater than 2 and with a CADI (consecutive Annual dividend increases) of greater than 2 and a forecast dividend increase of over 10%. The initial criterion throws up over 40 stocks across the DividendMax database, which is far too many to list. So we will add in an optimised yield of over 4% to reduce the numbers.

The results are summarised in the table below:

Looking at the list we like most of them on valuation grounds and for that reason we will take a further look by seeing what the brokers are saying about them. We have eliminated Barratt (who met the criteria) in favour of Bellway to ensure that we only have one housebuilder in the list.

We are going to eliminate the three FTSE 100 companies, BT Group, Travis Perkins and WPP on valuation grounds, but we will leave in ITV on account of its higher yield and the fact that they have been paying regular special dividends on top of that. Arrow global just about gets the nod over Alumasc and Utilitywise on account of greater broker coverage and the fact that all six brokers rate them a strong buy. Paragon, Bellway and Northgate all look cheap on fundamentals.

Savills looks good value and its yield is propped up by the fact that is goes ex dividend on the 14^th April. However it does not represent as good value as the previous three.

We put the European Assets Trust in because it met the criteria, but as it is a fund, we will eliminate it. It had a great year last year and is a very high yielding play on the European markets. Its dividends for 2016 have effectively been declared, although there is some currency risk as they are declared in Euro’s.

Rightly or wrongly, we will also eliminate Restaurant group due to weak broker support.

So, we have Northgate, Bellway, Paragon, ITV and Arrow Global.

Let’s have a look at the dividends paid by each company over the past years for which we have a history:

Northgate

We are estimating a full year dividend for 2016 of 17.2p, up 18.6%

Bellway

*They have declared an interim dividend for 2016 of 34p going ex on 19^th May 2016.

Paragon

ITV

Arrow Global

This represents an interesting selection. There are two relative newcomers in Northgate and Arrow Global and three companies who have been in recovery mode since the financial crisis.

As always it is difficult to make a final selection as all of the companies meet the criteria and taking account of their different businesses is tricky, but the numbers are good in all cases.

Recently ITV produced their final results for 2015 and once again they were very good although the shares were hit by the market for no particular reason as they predicted further good growth in 2016. EPS came in at a higher than expected 16.26p for an historic PE of just over 14x.

We shall have to wait for earnings forecasts for 2016 and 2017, but we expect upgrades to the current average analysts forecasts of 17.95p and 19.27p for the next two years which puts them on forward PE’s of 12.9 x and 12x respectively.

One of the features of ITV over the past 6 years of double digit earnings growth has been the growth in the dividend and according to DividendMax the ordinary dividend has grown by 62.5%, 34.6%, 34.3% and 27.7% in the past 4 years.

In addition to this there has been special dividends and ITV did not disappoint this year either with a special dividend of 10p per share.

Taken together with the final dividend that means a total of 14.1 pence per share will be paid out on the 27^th of May 2016 with the shares going ex-dividend on the 28^th April. Against the current share price of 237p, that is a total yield from the 2 dividends of around 6%.

Cash generation is strong and dividend cover is more than 2x. The 2015 ordinary dividend is covered 2.71 times by earnings.

The shares are currently trading at around 237p, which is well below the high for the year of 280p.

Arrow Global is a European purchaser and manager of debt portfolios. It now yields approx. 3% and will pay its final dividend of 5.4p on the 7^th July (going ex on the 8^th June)

The dividend is three times covered by earnings.

We are forecasting further double digit dividend increases in the next two years as Arrow takes advantage of growth in the European debt market.

Market forecasters continue to assert that the growth seen in the European NPL (non performing loans) market in recent years shows little sign of abating, and this is supported by independent research from PwC, which suggests that European NPL loan sales may well be up from €46 billion in 2012 to €160 billion in 2015.

It is not a glamour stock but there is good business to be in the European NPL market and Arrow has proven in its short time on the stock market that it can deliver.

Earnings forecasts of 26p and 31p for the next two years shows expected growth of 30% and 20% respectively and the PE at todays price of 231p is an undemanding 9.5 times next years prospective earnings.

Bellway are one of the highest quality stocks of the house-building sector and with the demand / supply equation still in their favour can be expected to keep on performing well.

Vehicle-hire company Northgate produced flat earning numbers, but used their good dividend cover to increase their interim dividend by 18.6%.

Paragon have rebuilt nicely since the financial crisis and are also buying back their own shares as well as providing substantial dividend increases.

It is a tough call but on balance we will go for ITV whose two dividends have been declared and who offer a combined yield of almost 6%.