Last year, dividend investors flocked to UK dividend-paying stocks, as UK dividend payouts swelled and the number of companies raising dividends increased from the year earlier. This year, following an estimated 15.6% increase in 2012, aggregate dividends paid by UK companies are expected to rise 3% to a new record of £81 billion ($128 billion), according to Capita Registrars (for comparison, see chart below, courtesy of Capita). While investors have plenty of options to find attractive yields and dividend growth in the UK, one of the best sources of ideas about stable and sustainable dividends in the UK is Mergent’s United Kingdom Dividend Achievers™ Index.
The United Kingdom Dividend Achievers™ Index consists of 113 constituents, representing companies incorporated in the United Kingdom that have raised dividends for at least 5 consecutive years. All Index companies are well-established firms whose stocks have qualities of liquidity and investibility. They are generally constituents of the FTSE
100 index, the index representing the 100 largest UK companies by market capitalization.
The quality of the United Kingdom Dividend Achievers™ Index is that it focuses on consistent dividend growth. That growth for the Index as a whole has been especially robust over the past five years, averaging 11.7%, well exceeding the rate of inflation. In fact, according to JPMorgan’s citing of Société Générale research, dividend growth alone has accounted for 56% of total nominal returns in the UK market between 1970 and 2011, above the 47% contribution in the United States. The chart and table below provide an international comparison of decomposition of nominal equity market returns for the noted period.
Based on the relevance of dividend growth in total returns over the long run, investors should consider the combination of attractive yield and sustainable dividend growth for best returns. Even though there are no exchange-traded products that track the United Kingdom Dividend Achievers™ Index, investors can focus their attention on specific Index members with consistent earnings power, attractive yield, and dividend growth sustainability. Many of the Index constituents trade as American Depository Receipts on the U.S. exchanges. Attention should also be paid to the companies’ valuations. Below is a closer look at the top 10 Index constituents by market capitalization.
Furthermore, as higher earnings growth has a potential to translate into higher dividend growth, two UK-domiciled dividend payers that trade on the U.S. exchanges stand out based on the robustness of their long-term forecasted EPS growth. The two companies are Carnival
)(LSE: CCL) and InterContinental Hotels Group
Carnival, a cruise company, is expected to grow its EPS at a robust 13.4% annualized rate for the next five years. The company’s dividend currently yields 2.5%, its payout ratio is 60%, and its annualized five-year dividend growth is about 2%. The stock has a trailing P/E of 24.3x. However, Carnival has a relatively low ROE of 5.4% and ROE of 4.0%. Its dividend payout ratio is elevated, but robust EPS growth could translate into higher dividend growth in the future.
InterContinental Hotels Group, a hotels and resorts company, is forecasted to expand its EPS at an annualized rate of 13.5% for the next five years. The stock currently yields 2.2% and has a payout ratio of 21%. Last year, it paid an interim dividend of 13.5p (21 cent per ADR) and a special interim dividend of 108.4p ($1.72 per ADR). Its trailing-twelve-month dividend is nearly 17% higher than the 2011 payout. The stock has a trailing P/E of 14.0x. InterContinental’s ROE is superb at 85.4% and its ROI is 25.8%. Given the company’s robust forecasted EPS growth and low payout ratio, additional boosts to regular dividends can be expected in the future.