LAST week was a pretty quiet one on the company news front. The reporting season for big companies with March 31 year-ends is more or less complete and it was left to a handful of second-line stocks to enliven those that look to the presentation of set-piece interim and final results to spur share trading activity.
From the relative calm, however, one intriguing theme emerged. It did not go across the board but three of the companies reporting used the occasion to jack up their dividend payments in exaggerated fashion.
Majestic Wine, the vintner, increased its annual dividend by 50 per cent. Radstone Technology, the electronic engineer that specialises in serving defence customers, did the same. And PHS, the washroom services business, went even further. It more than trebled its dividend payout to 1.7p a share.
In the broader context of the stock market these moves might be belittled as a largely irrelevant coincidence. The combined market capitalisation of the three firms is only £650 million and the total amounts paid by the three companies is a bare £12 million. Given that the UK stock market as a whole is worth more than £1,300 billion, it is no more than a drop in the ocean.
Research by HSBC, the investment bank, estimates that dividend payments for the market as a whole rose by a much more modest 7 per cent. The progression is even more modest, says HSBC, once you take into account the fact that some big dividend payers declare dividends in US dollars and exchange rates have moved to depress the value on translation. Adjusted for currencies, HSBC estimates that dividend growth is only 4 per cent.
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But for private investors, who, unlike institutions are not compelled or tempted to weight their equity portfolios in accordance with different market capitalisations of quoted stocks, the all-share averages may miss the point. Retail investors, because they invest smaller amounts, can focus attention on shares regardless of their size. If institutions make meaningful investments in smaller-cap shares, their trading activity can affect prices detrimentally.
That said, the Majestic, Radstone and PHS examples add to the body of anecdotal evidence garnered through the past six months which suggests that dividend payments have risen up the list of director priorities. Yes, the warming economic climate makes companies more confident about paying larger dividends. And yes, as smaller companies grow more mature it is only natural that the importance of dividend payments come to the fore.
If inflation is picking up, as economic data published this week appears to suggest, investors will need enhanced dividends in order to keep ahead. But the notion that dividend increases play an increasingly critical element of total investment returns also seems to be gaining in popularity. If, as is logical, sustainable dividend payments play a key role in driving capital gains, the shift must be viewed as being almost entirely positive.
So where does one look for the companies that might deliver outsized dividend growth? Database search devices, such as the “Guru” product run by Hemscott, the stock market information specialist, is one source. It may not be enough to seek stocks that analysts reckon will raise payouts. Forecast information may be priced into share values.
Some dividend rises run far ahead of predictions: the PHS payment did. But the best place to start a search may be with dividend cover, the multiple of times earnings per share can be divided by dividend. The average payout ratio points to the affordability of the dividend and the average runs at just under two. So companies that have dividends covered five or more times by earnings, and are on course to increase earnings by at least 20 per cent in the coming year, might be considering bumper dividend rises. Included in this group are Goldshield Group, the pharmaceutical concern, Carphone Warehouse, the telecoms retailer, IFX, the spread-betting bookmaker, Sondex, the oilfield services group, ROK Property Solutions, the construction company, and WS Atkins, the support services firm.
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Summer wine, page 7