How Marks & Spencer Will Deliver Its Dividend

LONDON -- I'm looking at some of your favorite FTSE 100 companies and examining how each will deliver their dividends.

Today, I'm putting iconic high street retailer Marks and Spencer Group (MKS +0.09%) under the microscope.

Dividend history: cut No. 1
All was rosy with M&S in the mid-1990s. Within its final results for the year ended March 1998, the company was able to toast five-year earnings-per-share growth of 62% and dividend growth of 77%. The 1997-1998 dividend was covered around twice by both adjusted and statutory EPS -- a healthy level of cover, you might think, with little imminent risk to shareholders' income.

However, M&S suffered a terrible second half the following financial year. Profits collapsed, the final dividend was held flat, and the total dividend for the year (14.4 pence) was barely covered by adjusted EPS and uncovered by statutory EPS.

The next year -- 1999-2000 -- profits fell again as a result of restructuring charges. M&S slashed the dividend by 37.5%, the payout representing the entirety of the company's profits for the year.

Dividend history: cut No. 2
M&S was soon able to begin increasing the dividend again from the "rebased" level, but it was not until 2005-2006 that the payout got back to being twice covered by EPS -- although the dividend itself of 14 pence was still below the 1998-1999 level. The company told us its dividend policy going forward: "With dividend cover now restored to over two times, the Board's future policy is to grow dividends broadly in line with adjusted EPS growth for each half of the financial year."

Within two years M&S had increased the dividend to a record level of 22.5 pence... then came the great recession. In announcing its 2008-2009 results, the company said it would be rebasing the dividend to 15 pence -- a 33% cut, and almost back to the level of a decade ago. Shareholders heard a familiar refrain: "The Board's policy regarding future dividends is to rebuild cover toward two times and thereafter, to grow dividends in line with adjusted EPS."

The current state of play
M&S has paid a dividend of 17 pence a share for each of the last three years. The table below shows how the payout has measured up against the policy of having a twice-covered dividend growing in line with adjusted EPS.

As the table shows, M&S has paid dividends in line with its policy over the past three years. Analyst dividend expectations for the next two years of 5% to 6% annual growth are also in line with the company's twice-covered-by-earnings target -- assuming, of course, that the analyst earnings forecasts are on the money.

Summing up
M&S may not have grown its dividend over the past three years, but the dividend has been covered around two times by earnings as per the Board's policy, and analyst expectations for the next two years don't look unreasonable.

However, as I've shown you, M&S' earnings in the past have been capable of taking a sudden and dramatic turn for the worse, with a consequent unwelcome effect on the dividend.

This is not unique to M&S, but something to which companies in the general retailer sector are broadly vulnerable. The sector is invariably one of the hardest hit during recessions, but even when economic conditions are benign there are so many ways for businesses that rely on the fickle consumer and fast-changing fashions to get their offer wrong.

Investors who are particularly interested in a steadily growing income should bear in mind that M&S -- and other general retailers -- are always likely to give you a bumpy dividend ride.

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