LONDON -- Ace City investor Neil Woodford has thrashed the FTSE 100 over the last five, 10, and 15 years. Hence, I always keep an eye on his holdings for promising investment ideas.
Woodford is very selective in picking shares for his 20 billion pound funds. Fewer than one in five of the U.K.'s top 100 companies earn a place in his market-beating portfolios.
The following three companies have notable records as fast dividend growers over the last four years:
|
Company |
Share Price (pence) |
Annual Dividend Growth (%) |
Forecast Yield (%) |
|---|---|---|---|
|
Smith & Nephew (SN 1.03%) |
753 |
20 |
2.3 |
|
Wm. Morrison Supermarkets (MRW) |
266 |
20 |
4.9 |
|
Serco (SRP 0.33%) |
602 |
19 |
2.0 |
Smith & Nephew
Woodford began investing in Smith & Nephew during the second half of 2011. In usual myopic fashion, the market had knocked the shares of the orthopedics, endoscopy, and wound-management group after one quarter of underwhelming business performance.
Woodford's timing was not only good because of his buy price -- around 564 pence, according to my calculations -- but also because Smith & Nephew was soon to announce a step-change in the level of its dividend. The board hoisted the 2012 payout by 50%. Despite the megarise, the dividend was covered almost three times by earnings.
Smith & Nephew offers only a low yield -- a full percentage point below the FTSE 100 -- but the well-covered dividend adds security. Analysts are expecting the payout to grow by 20% across the next two years.
Wm. Morrison Supermarkets
Morrisons may be the U.K.'s No. 4 supermarket, but it's No. 1 in Woodford's eyes, being the only company in the sector he holds.
Like Smith & Nephew, Morrisons' recent historic dividend growth has been boosted by a change of dividend policy. In Morrisons' case, it hasn't been a single upward rebasing, but a gradual increasing of the dividend by more than earnings to deliberately bring cover down to the sector average of around 2.4 times.
There's a year left to go on Morrisons' current three-year policy of increasing the dividend by at least 10% a year. Life has got tougher for supermarkets since the board set the policy, but if Morrisons' dividend growth is set to moderate, the compensation is a 4.9% yield, which is one-and-a-half percentage points higher than the FTSE 100 average.
Serco
Woodford is keen on businesses in the support-services sector, and has built up a decent-sized holding in Serco over the past couple of years. The group operates in areas as diverse as prisons, laboratories, and air traffic control, to name but three.
Serco's dividend yield is even skinnier than Smith & Nephew's, but historic growth has been "organic" -- that's to say, unaided by the kinds of policies that have boosted Smith & Nephew's and Morrison's growth.
However, Serco has just embarked on a staggered cover-reduction policy for the dividend, a la Morrisons'. Serco's board intends to progressively reduce cover over the next three years from 2012's 4.7 times to between 2.5 and 3 times.
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