A Closer Look at Marks and Spencer Group's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Marks and Spencer Group  (LSE: MKS  ) and assessing whether the company is an appetising pick for income investors.

How does Marks and Spencer Group's dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share 17.8 pence 15 pence 17 pence 17 pence
DPS Growth -20.90% -15.70% 13.30% -
Dividend Cover 1.6x 2.2x 2x 2.1x

Source: Marks and Spencer company accounts.

Marks and Spencer has endured a turbulent time over the past five years, and was forced to slash the dividend twice during the period. A 40% earnings per share crash in 2009 prompted the retailer to rebase the dividend to 15 pence, and announce that it would grow shareholder payouts in line with earnings. Stagnating earnings in 2011 and 2012 thus caused the dividend to stand still.

However, the firm also said in 2009 that its dividend overhaul would also encompass building dividend cover to around two times forward earnings, providing improved stakeholder protection in case of earnings pressure further ahead.

What are Marks and Spencer Group's dividends expected to do?

  2013 2014 2015
FY Dividend Per Share 17.1 pence 17.8 pence 19.1 pence
DPS Growth 0.60% 4.10% 7.30%
Dividend Cover 1.9x 2x 2x
Dividend Yield 4.10% 4.30% 4.60%

Source: Digital Look.

Analysts expect the total dividend for the year ending this past March, which will be revealed in the firm's results due on May 21, to edge fractionally higher to 17.1 pence before gaining traction in the following two years.

Although earnings per share are expected to fall 7% in 2013, City estimates still expect the dividend to rise fractionally, roughly in line with the company's targeted dividend coverage. Thereafter, however, brokers expect EPS growth of 8% in both 2014 and 2015 to be greeted with more sizable dividend increases.

Marks and Spencer announced in its latest trading statement in April that although group sales increased 3.1% during the first quarter, British sales dragged on performance, climbing just 2.6% and with like-for-like up a meager 0.6%. This was due to further insipid clothing sales, which pushed general merchandise revenues 3.8% lower.

Despite continued woes in the retail environment at home, the company is witnessing improving activity in international markets, and saw sales abroad rise 7% at constant currencies. The firm knows how to use its position as a British retail icon to push into exciting emerging markets, and more specifically is looking to boost the number of stores in India and China up to 2016. I expect this to drive earnings and thus dividend growth in coming years.

How does Marks and Spencer Group's dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
General retailers 2.50% 23.3
FTSE 100 3.20% 15.5

Source: Digital Look.

Marks and Spencer currently deals on a P/E rating of 12.9 for 2013 and 12 for 2014, representing a mammoth discount to the average forward earnings multiple for its competitors as well as better value compared with the wider FTSE 100. As well, its estimated dividend yields are also more attractive when compared to its sector and large-cap peers.

In my opinion, the retail giant's ambitious restructuring plan, comprising aggressive moves into new geographies and taking a multi-channel approach through driving online volumes and boosting franchise stores, bodes well for future growth. I expect the shopping house to once again hurdle troubles on the U.K. high street and head higher.

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