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21st century dividend kings?

Equity Analyst Emilie Stevens puts UK stock market dividends under the microscope.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Last time we looked at a few things we consider when looking for sustainable dividend paying companies.

This time we’ve put the UK stock market, with companes from the FTSE 100 and FTSE 250, to the test. First we looked at which companies have maintained or increased their dividend every year this century and then we asked – can they afford it?

Before we dive in, please remember that a company’s past performance is not a guide to its future, dividends along with the value of your investment can and do change so you could make a loss.

This article is not personal advice, so if you're not sure whether an investment is right for you, please ask for advice.

Increasing dividends this century

The companies in the table below have maintained or increased their dividend every year this century.

Impressive, but hold your horses.

By adding in our “can they afford it” tests, which look at how well a dividend is covered by a company’s profits and free cash, we start to build a slightly different picture.

Despite a good track record of dividend increases, some companies are less convincing when it comes to whether they can afford to keep paying it longer-term.

This is why it’s important to look at companies from lots of different angles, and consider your attitude to risk before making decisions. Ratios and dividends should not be looked at in isolation, they are only a snapshot at a given point.

Companies in the FTSE 350 that have maintained or increased their dividend every year since 2000

Dividend cover* Free cashflow*
A.G. Barr 1.7 2.0
Associated British Foods 3.0 2.3
BAE Systems 2.0 1.6
British American Tobacco 1.5 2.2
Bunzl 2.6 2.9
Clarkson 1.4 0.7
Cranswick 2.6 0.4
Croda International 2.1 1.5
DCC 2.5 2.4
Diageo 1.8 1.6
Diploma 2.2 2.0
Dominos Pizza Group 1.6 1.5
GlaxoSmithKline 1.5 1.5
Go-Ahead Group 1.6 2.9
Greggs 2.0 2.1
Halma 3.5 3.3
IMI 1.8 1.4
Imperial Brands 1.4 1.5
James Fisher and Sons 2.7 3.3
Meggitt 2.1 1.8
Oxford Instruments 5.0 5.0
PZ Cussons 1.5 1.5
Reckitt Benckiser 2.0 1.7
RELX 2.0 2.0
Sage Group 1.7 2.4
Spectris 2.6 2.1
Spirax-Sarco Engineering 2.4 2.4
SSE 0.7 -0.5
Ultra Electronics 2.2 1.8
Victrex 1.8 0.5
Weir 1.9 1.6
WPP 1.7 1.8

Source: Thompson Reuters Eikon 24/02/2020, Company Annual Reports

*Data uses the most recent full financial year dividend and excludes financial companies

*Dividend Cover = Earnings per share / Dividend per share

*Free cash cover = Free cash / Total Dividend

Shares are shown in alphabetical order. Past performance isn’t a guide to the future.

Why a past winner might not make a winning investment

Halma has been a bit of a legend when it comes to dividends – last July marked its 40th year of consecutive dividend increases.

It specialises in a few niche markets, with technologies that cover everything from fire detection to medical diagnostics. Thanks to long-term growth drivers like a surge in health and safety regulations, Halma has boasted high stable margins and cash flows. This is what’s underpinned the dividend.

We can see this in the table, dividend cover is 3.5 times and free cash cover 3.3 times – this suggests the dividend is currently more than affordable.

However, as in most walks of life, this quality comes at a price. Halma’s stellar performance has not gone unnoticed.

The shares currently trade at 35.9 times future earnings, far above a longer-term average of 21.6. That means Halma is priced with the expectation of delivering near perfect performance. Even a whiff of operational underperformance could knock pence off the share price and pounds off any investment.

Moving on to the dividend. While the evidence suggests it’s reliable and comfortably affordable, the high share price means the prospective yield is just 0.8%. Hardly tempting. In fact, there are savings accounts with interest rates higher than this – without any investment risk at all. Bear in mind that dividends can always change.

So while Halma’s shown us what a steady dividend could look like, it also shows there are other factors to consider when making investments.

Danger high voltage – track record isn’t everything

At the other end you have SSE, the electricity utility and renewable energy giant.

Life as a utility means your prices and therefore earnings are decided by the regulator. That has tended to make them more stable with the dividend more stable too, so in the past utilities have been favourites amongst income seeking investors.

However a quick glance back at the table suggests all is not well under the surface. Based on the 2018 full year numbers (the most recent available) SSE’s dividend fell into the camp of ‘not affordable’.

Dividend cover is below one and free cash is actually negative – meaning SSE is borrowing to pay the dividend. This is unsustainable and should set alarm bells ringing about a potential dividend cut.

And that’s exactly what happened. This year saw SSE cut its dividend for the first time in over 25 years. A tale of low profitability in a highly capital intensive business with the looming prospect of tougher regulation, may not have a happy ending.

SSE currently trades at 17.4 times earnings and offers a prospective yield of 4.9%. Yields are not a reliable indicator of future income.

What does this all mean?

A dividend may have been reliable in the past but that doesn’t make it a good investment and an esteemed dividend track record doesn’t mean it’ll stay that way.

Choosing a dividend paying company is no different to any other share. We’re looking for companies who can grow profits over the long term but can be purchased at an attractive price.

Over the next couple of weeks we’ll be looking at companies that we think fit the bill.

Sign up to our weekly Share Insight below and we’ll send you a copy.


Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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