LONDON -- When it comes to dividends, big is not necessarily beautiful. A large yield can be a sign that a company cannot identify any investment opportunities of its own. Sadly, big dividends often get cut when profits cannot sustain the payout.
Income investors like to see companies increasing dividends at a rate faster than inflation. This means that the spending power of their income increases with time.
To discover the market's dependable dividend-payers, I applied a set of selection criteria to a share database. I wanted to find shares that:
- increased their dividend for more than four years running;
- delivered an average compound growth rate in the last five years of more than 8%;
- had a dividend covered at least 1.5 times by earnings.
Here are the 10 largest shares that qualified.
|
Company |
Price (pence) |
Five-Year Avg. Annual Dividend Growth |
Dividend Cover |
Yield |
P/E |
Market Capitalization (millions of pounds) |
|---|---|---|---|---|---|---|
|
BHP Billiton (LSE: BLT.L) |
1,920 |
19% |
3.3 |
3.7% |
7.9 |
102,162 |
|
AstraZeneca |
2,980 |
10.2% |
2.2 |
6% |
6.4 |
37,328 |
|
Tesco (LSE: TSCO.L) |
339 |
8.9% |
2.3 |
4.4% |
9.9 |
27,265 |
|
Reckitt Benckiser |
3,610 |
22.4% |
1.9 |
1.6% |
21.2 |
26,090 |
|
Imperial Tobacco |
2,440 |
12.1% |
1.9 |
4.1% |
14.2 |
24,156 |
|
Prudential |
787 |
8% |
2.6 |
3.35 |
12.5 |
20,116 |
|
Centrica |
328 |
9.2% |
1.6 |
4.8% |
12.4 |
17,031 |
|
Rolls-Royce Holdings (LSE: RR.L) |
827 |
12.8% |
2.8 |
2.2% |
27.7 |
15,484 |
|
Compass |
712 |
13.8% |
2 |
2.8% |
19 |
13,322 |
|
British Sky Broadcasting (LSE: BSY.L) |
762 |
10.4% |
2.1 |
3.3% |
14.1 |
12,757 |
Four stood out in particular.
1. British Sky Broadcasting
The strategy behind Sky's success is straightforward: get more people to pay Sky more money for more services.
Few British consumers can imagine life without television and broadband. Today, these services are regarded more as utilities than luxuries. Sky cashes in on this demand by being one of the leading providers of the so-called "triple play" of telephone, TV, and Internet.
In 2008, Sky's average annual revenue per user was 427 pounds. For 2012, this figure hit 548 pounds. In that time, customer numbers increased from 8.98 million to 10.6 million.
The reliability of this income stream has enabled Sky to increase its shareholder dividend for eight years running. Analysts expect both profits and the dividend to continue to rise for the next two years. Consensus is for a 9.3% rise in dividend for 2013, followed by a 7.4% rise the year after. Earnings are expected to rise at a slightly slower rate, meaning dividend cover will fall.
2. Tesco
Tesco shares currently trade at their highest since the company issued a disappointing profit update in January.
Tesco has a proud dividend history. No other FTSE 100 company has a longer record of increasing dividends to shareholders. Tesco has upped its payout for 27 years running.
Unfortunately for shareholders, Tesco appears to be losing market share. A recent survey from market researcher Kantar Worldpanel showed Tesco's share of the U.K. market at 30.9%, down from 31% one year ago. While that may not sound all that bad, rivals Sainsbury's and ASDA are catching up -- fast. Further worry comes from the continuing march of Waitrose and budget chains such as Lidl and Aldi.
Tesco also appears determined to enter already competitive markets like banking and electrical retailing. While Tesco Bank's mortgages may have made the press, I'm unconvinced that Tesco Direct can compete effectively with Amazon.
3. BHP Billiton
BHP Billiton's future seems to hinge on the success of the Chinese economy.
The share prices of BHP and its peers suggest that the market is factoring in a significant possibility that China will suffer a hard landing. The company's recent interim results reported an 18.3% rise in earnings per share and a 10.9% dividend increase. Of some concern, however, will be the flat turnover and management mutterings of "subdued commodities prices" and "higher capital costs."
Today, BHP Billiton trades on a forward price-to-earnings ratio of 9.3 times consensus forecasts and an expected dividend yield of 4.1%. On these measures, BHP hasn't been this cheap since the financial crisis.
At these levels, could BHP be a contrarian buy? Although earnings are forecast to fall for 2013, the dividend is expected to continue rising. With the payout more than twice covered, a dramatic reversal in profitability would be required to threaten the yield.
4. Rolls-Royce
Rolls-Royce's main business is the manufacture of aircraft engines. Make no mistake -- Rolls-Royce is genuinely a world-class U.K. manufacturer. Furthermore, Rolls-Royce is an incredibly strong brand. In a market where product failure could result in fatalities, buyers will pay top dollar for the top of the range.
The company uses its dominant position in the industry to pay its shareholders a dependable dividend. Rolls-Royce has not cut its payout since 1998, and the dividend has increased every year since 2007. Those increases have been coming in at an average rate of 12.8% per year.
Dividend growth is expected to continue for the next two years at an average of 11.3%. This is forecast to be outstripped by earnings growth, meaning the payout will become even better funded.
While the current yield is lower than many other shares on the market, it comfortably outstrips cash and is rising. Aircraft engine manufacture works to much longer lead times than much of the economy. This means that Rolls-Royce shares are likely an excellent diversifier against many other investments.
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