Our latest research 03/06/2014

DividendMax write up 02/06/2014

This time we are going to take a look at those stocks that we believe have a solid future of returning capital to shareholders either in the form of share buybacks, Special dividends, increasing normal dividends or some combination of the three. Unlike our previous work, we are not going to come up with a single stock winner, but present our readers with a quality selection in order for them to draw value conclusions. The classic reference stock for this work is Next PLC which has used all three measures to return excess capital to shareholders.

We are going to take a global view. Our first criterion is for a forecast dividend increase (FDI) of greater than 10%. This reveals an unmanageable 250 companies so we need to tighten our criteria. Any company undertaking what we are looking for will have good dividend cover so we look for greater than two. Additionally, these companies should have a solid dividend track record so we add in a CADI (consecutive annual dividend increases) of 5. We also want a decent return so let’s have an annualised yield of over 2%. This still leaves us with 39 stocks. We are going to have to cheat a bit and give special dispensation to Apple and Easyjet who have only started paying dividends over the past few years and they would therefore fail the CADI condition.

Unfortunately, DividendMax does not hold information on share buybacks although we do frequently comment upon them. Basically, as a general rule, if a company is making share buybacks, then the dividend is relatively safe. We also believe that what the company is actually doing when it has a choice of the three, gives clear messages to investors as to what the management think. In the case of Apple in recent times, they basically were saying to the market, we believe our share price is too low, so we will focus on the buybacks. In the case of Next, they believe that the current share price is too high for buybacks, so they are paying lots of special dividends as their preferred means of returning excess capital to shareholders. Anyway, back the original point, I am going to have to manually select the list of those doing share buybacks. We have two so far.(Easyjet and Apple) We add Micro Focus to the list as they frequently pay special dividends (return of value) by means of ‘D’ share schemes. Also, WH Smith, Intercontinental Hotels, Spirax-Sarco and Microsoft.  This list is by no means exhaustive, but we cannot deal with every potential contender. At the end of this piece we suggest other companies that members should looks at.

One of the things to remember about share buybacks is that some companies are good at it and some are not and it is these judgements that you are backing. Another crucial factor is the sustainability of the return of capital in whatever form it takes.

Looking at the fundamentals of our initial list we have:

We are going to eliminate Intercontinental Hotels and Spirax-Sarco on valuation grounds, although we appreciate that both are excellent companies.

Before we investigate further we will have a look at what the brokers are saying about our survivors:

Let’s remind ourselves of the dividend histories of our final six:

Apple

*Q1 dividend of 305c and a Q2 dividend of 329c already paid.

Next

*they have declared a final dividend of 93.0p for 2013 going ex on 9^th July 2014. They have also declared a third special dividend for 2013 of 50p (also goes ex on the 9^th July) making 150p per share in specials in the 2013 financial year. (on top of the 129p normal dividend)

Microsoft

*already the first two quarterly dividends at 28 cents each

WH Smith

They have declared a 2014 interim dividend of 10.8p going ex-dividend on 16^th July 2014

Easyjet

Currently paying annually. A further six months or so to discover the 2014 dividend payout.

Micro Focus

Certainly, a strong choice and very interesting to notice that three of the companies are tech stocks. The market is starting to appreciate that whist tech stocks can start to slow in their growth, they do throw off a lot of cash and as Next have proved over the years, you do not have to grow the business at blue sky levels to provide exceptional returns to shareholders.

The U.S stocks are particularly interesting to UK investors as the impact of paying dividends in US dollars has shown through adversely this year. By investing directly in US stocks there is a full exposure to the dollar that you have partially if you invest in say, BP for dividends, who pay their dividend in dollars. A rebound in the dollar would be interesting for investors in Apple and Microsoft both from a dividend and a share price perspective. We are not tax experts, but we believe that registering for the dividend tax break / reciprocal arrangement with the US is a one off affair that covers all stocks. (unlike many European countries where it is done on a stock by stock basis)

Other Stocks to consider:

British Sky Broadcasting

Imperial Tobacco

Sage

St James’s Place

Photo-me International

John Wood group

Glaxo

Admiral

Raven Russia

Paypoint

888 holdings

Many of the house builders are returning cash to shareholders