Prudential: A FTSE 100 Dividend-Raising Star

LONDON -- In an outcome that's tough on investors, the FTSE 100 (UKX) 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 the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year

2007

2008

2009

2010

2011

Dividend per share

19.1p

20.2p

17.1p

16.2p

18.1p

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 Prudential (LSE: PRU.L  ) (NYSE: PUK  ) .

The big question is, can the company's dividend continue to outperform its index? Let's put the firm under scrutiny and test its financial mettle.

Prudential describes itself as an international financial services group, but most people will probably know it as an insurance outfit. With the shares at 833 pence, the market cap is 21,285 million pounds. This table summarizes the firm's recent financial record:

Year

2007

2008

2009

2010

2011

Revenue (millions of pounds)

18,359

18,993

20,299

24,568

25,706

Net cash from operations (millions of pounds)

1138

1144

108

1948

1738

Diluted earnings per share

28.8p

(16p)

27.6p

56.6p

58.7p

Dividend per share

18p

18.9p

19.85p

23.85p

25.19p

So, the dividend has increased by 40% during the last five years -- equivalent to an 8.8% compound annual growth rate.

Prudential derives by far the majority of its profits from insurance operations. Of the company's total profits, around 41% come from the U.K., 30% from Asia, and 29% from the U.S..

The source of these generally cash-backed profits is more than 26 million customers and 363 billion pounds of assets under management. It carries out operations under four main business units: Prudential Corporation Asia, Jackson National Life Insurance Company, Prudential U.K., and M&G.

Judging by the firm's record of trading, cash flow and profits suffered in the recent financial crisis, but both have made a full recovery since. Laudably, the progressive dividend policy remained unscathed throughout the period. If investors can stomach the esoteric financial reporting, and the cyclical nature of the business, Prudential could be a good dividend bet going forward. The directors see most opportunity for future growth in South East Asia. If that growth generates free cash, it can only be good news for the dividend.

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

  1. Dividend cover: The recent dividend was covered more than twice by earnings: 4/5
  2. Net cash or debt: Net gearing appears to be comfortably below 50%: 4/5
  3. Cash flow: Cash flow supports profits but both can be lumpy: 4/5
  4. Outlook and recent trading: Good recent trading with a cautiously positive outlook: 4/5

Overall, I score Prudential 16 out of 20, which encourages me to believe the firm's dividend can continue to out-pace dividends from the FTSE 100.

Foolish summary
Although the business is prone to cyclical stresses, Prudential seems to be firing well on all four of my test-criteria cylinders.

Right now, the forecast full-year dividend is around 28.7 pence per share for 2013, which supports a possible income of about 3.4%. That's not bad, but the company can stay on my watchlist for the present.

Prudential is one of several dividend outperformers on the London stock exchange. There's one man who's as keen as I am to find and invest in them. I suggest you read all about his best investment ideas now in this free, time-limited report, while you have the chance: "8 Income Plays Held by Britain's Super Investor." This free report analyses the 20 billion-pound portfolio of legendary high-yield expert Neil Woodford. Click here now to discover his favorite dividend opportunities with good growth potential.

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Further investment opportunities:

Kevin does not own any shares mentioned in this article.

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