Capita: An FTSE 100 Dividend-Raising Star

LONDON -- In an outcome that's tough on investors, the FTSE 100 has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF, for example. This is an exchange-traded fund that tracks the benchmark index, and we can see that the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Capita (CPI 1.21%).

The big question is whether the company's dividend can continue to outperform its index. Let's take a closer look.

Capita is one of the U.K.'s leading outsourcing specialists. With the shares at 766 pence, the market cap is 5 billion pounds. This table summarizes the firm's recent financial record:

So the dividend has increased by 78% during the last five years -- equivalent to a 15.6% compound annual growth rate.

In an update released on Nov. 13, Capita sounded upbeat, citing a record 1.7 billion pounds in contract wins to that point during 2012. Apparently, that's the tip of a 4 billion pound iceberg of bids backed up by a buoyant prospect list. If that business all converts to cash flow, the prospects for the dividend look encouraging, especially when compared to Capita's record on earnings and dividend growth.

Capita's business is providing operations execution skills to organizations. Clients outsource "noncore" functions to Capita, like administration, ICT, HR and payroll, strategic development, and business process engineering. Capita then either takes the work directly or comes into the organization to introduce better systems and processes and train the client's staff to use them. Active mainly in the U.K., last year the firm derived 20% of revenue from local government, 15% from health, 13% from education, 10% from central government, 8% from insurance, 7% from life and pensions, 4% from financial services, 3% from transport, and 20% from other businesses in the private sector.

Well more than half of revenue comes from the public sector. Public-sector organizations have always lacked the discipline learned from commercial success or failure to drive operational-execution efficiency, so I think forward demand for "fixers" such as Capita is likely to remain firm.

Capita's dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:

1. Dividend cover: Earnings more than twice covered the last dividend. Score: 4/5

2. Net cash or debt: Net gearing is about 145%, with borrowings about 3.8 times earnings. Score: 2/5

3. Cash flow: Cash flow slipped behind profit with the last full-year results. Score: 2/5

4. Outlook and recent trading: There is good recent trading and a positive outlook. Score: 5/5

Overall, I score Capita 13 out of 20, which encourages me to believe the firm's dividend can continue to outpace dividends from the FTSE 100.

Foolish summary
There's a fair chunk of debt on the balance sheet, and cash flow fell a little behind last year, but recent trading, a positive outlook, and solid dividend cover are all encouraging.

Right now the forecast full-year dividend is 25.24 pence per share, which supports a possible income of about 3.3%. That seems like a full price to me, so I'll keep the shares on watch for the time being.

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