The FTSE 100 dividend stars

It’s quite surprising, given the high yields from FTSE 100 companies pre-covid-19, to find that just five FTSE 100 companies can boast rising dividends over the past decade and which still anticipate at least 2% growth in their dividend this year.

The picture for income investors is proportionately worse on the FTSE 250. Just seven companies from that index have managed to achieve the feat.

Turning back to the FTSE 100, these are the five companies that have managed to keep pushing up their dividends and will keep paying shareholders: Legal & General, Pennon, Croda International, Halma and Spirax-Sacro Engineering.

Legal & General (LON:LGEN)

The insurer and asset manager has seen its share price hit hard by the coronavirus-induced downturn in the stock market. During 2019 and the first months of 2020 the share price was flying up.

Legal & General share price chart
Legal & General share price chart

From an income-investors point of view, the shares still make for a compelling investment based on its commitment, in the face of regulator pressure, to keep paying the dividend. The shares also yield over 8%. The dividend yield was high pre-covid-19 – at over 6% – and the share price fall has pushed the yield up further. Now it’s over 8%.

Citigroup has raised its price target recently for the group. It pointed out to clients that “In our recent sector note we upgraded L&G to Buy and from subsequent investor discussions it is clear that it remains one of the most polarising names in the sector.”

They added: “Bulls point to growth opportunities, competitive advantages, a strong track record of avoiding defaults and a solvency position that can absorb further shocks.”

These were the positives. However, there is a bear case against the shares as well. “Bears worry about sector-leading credit gearing, the level of BBB holdings, the opacity created by direct investment holdings and capital generation dividend cover.”

I’ll continue to hold my shares in Legal & General but I’m not looking to add. I think the shares are risky to buy right now for income, given the pressure on L&G to cut the dividend. However, on the flip side, the shares are looking good value at the current price.

Pennon (LON:PNN)

Like other utilities the owner of South West Water, ought to be a reliable payer of dividends. Pennon is expecting the sale of waste management division, Viridor to complete in the summer, which would add significant cash to the balance sheet. The group already seems well-financed with £1.6bn of cash and committed facilities providing liquidity.

The company has been catapulted into the FTSE 100 only recently, a sure sign of how well the company and by extension its share price has been doing. The strong performance has kept a lid on the yield which is still a generous 3.6% and which ought to be sustainable.

Concentrating on water may be no bad thing for Pennon. South West Water is a well-run operation, judging by the rewards it gets from Ofwat. The current regulatory period has just started so the group has predictable, highly regulated earnings through to 2025 which is reassuring for investors.

At a time of negative yields on UK government gilts, investing in a utility may become far more appealing for many investors. This is a good share to own for income in my view.

Croda International (LON:CRDA)

Based on yield alone compared to L&G and Pennon, chemicals company, Croda, doesn’t seem to offer income investors much besides an historic ability to keep raising its dividend. The dividend yield has tended to be low and is currently only 1.7% and that’s alongside a P/E of 28. All things considered however the share price has held up relatively well and has bounced back from the market fall in March.

Its three-year record versus a rival I hold, Synthomer, is much superior. An indicator that yield alone isn’t everything. As fund manager Terry Smith says, it’s better to look at overall returns. In this regard Croda is potentially a decent investment. Especially when the economy improves.

Croda works with some high-growth end markets such as life sciences and personal care. The group has high margins and good cashflow. Return on sales is above 20%.

There is plenty of room to grow internationally and to keep innovating and I expect the group to keep driving up its shareholder returns.

With good dividend cover, above 2x, and single-digit dividend growth Croda has sustainability built into its dividend policy. I think this bodes well for ongoing growth.

Halma (LON:HLMA)

Halma fits squarely into the category of income growth share. The yield is too low to be appealing to anyone whose primary objective is income, as it’s less than 1%. Again, it’s about total return with this share. And also about small, sustainable, incremental growth in the dividend, which Halma has been able to achieve, unlike some higher-yielding shares.

The group has a history of value-accretive bolt-on acquisitions. Its earnings should also be stable given it’s involved in a meaningful way in health & safety.

Given the growth is no secret, the shares are expensive. I’d be tempted to wait for them to fall before buying in, especially if you believe the market is due another correction.

It’s tempting to think at some point the wheels might come off such an expensive, highly-acquisitive company but to date, the shares have done exceptionally well. Management has also avoided “transformational” M&A which so often destroy value and that’s to their credit. Long may it continue.

All that being said, although in the past the group has done very well achieving high total returns for investors and growing the dividend. I don’t believe it’s worthwhile investing in for income. The company is too focused on growth and the yield is too low. That said dividend cover is high at 3x earnings and growth tends to be steady at around 7% year-on-year.

Spirax-Sacro Engineering (LON:SPX)

This company is a bit under-the-radar. It’s made up of three business units involved in different manufacturing sectors. Spirax Sarco and Gestra are involved in the control and management of steam. Chromalox, together with recent acquisition Thermocoax, offers electric thermal solutions. Watson-Marlow provides customers with peristaltic pumps and associated fluid path technologies.

It bears some similarities to Halma in its business model. Also, it’s another expensive share with a low yield. A P/E of over 35 is a high price to pay for a company involved in this sector, especially at this time.

As an industrials company, it has been hit harder by covid-19, warning the months ahead are likely to be difficult. Although on the upside, the company is confident of weathering the crisis. In no small part because more than half the company’s sales are to critical sectors such as hospitals, food and beverage and power generation.

The group expects the COVID-19 coronavirus to reduce annual sales and profit by 2% to 4%. Combined with negative currency movements the virus’s effect is likely to offset underlying growth in 2020.

The 1.1% dividend yield seems safe for now, but given how expensive the shares are I don’t think they are worth investing in for income. Although they do have strong, sustainable growth of around 10% year on year.

I’m a fan of companies that have dividend cover above two, which some of these lower yielding shares do, making it easier for them to grow the dividend sustainably year after year. It makes the need to cut the dividend less necessary than at many companies where dividend cover is low or negative.

Sustainable growth in the dividend is also attractive for income investors, however, I prefer the higher yield on offer at Pennon and feel that it’s the share I’m mostly likely to buy into from these five, although I believe there are better shares than all these; it’s just they don’t meet the criteria around historic dividend growth.

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You can also read my latest article on dividend hero investment trusts here.

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