4 September 2018 AlphaScreens: Dividend test clues Movements in our dividend yield rankings off er hint to investors High-yield small-caps Algy Hall’s view: 350 nvestors neglect dividends at their peril. Over the 25 years to the 300 FTSE Small-Cap/Aim All-Share end of 2017, the average annual return from the FTSE All-Share High-yield small-caps 250 based on share price alone stood at 5.5 per cent, compared with 200 I a 9.2 per cent total return once dividends are factored in. And the 150 benefi t of reinvesting dividends over the long term makes the differ- 100 ence even more pronounced, with the 25-year cumulative total return 2012 2013 2014 2015 2016 2017 Source: Thomson Datastream from the FTSE All-Share standing at 727 per cent, compared with 310 per cent ignoring dividends. As well as providing income, a good yield Safe yields (large–caps) can suggest a company has attractive qualities that could support share price performance, and a robust dividend record can indicate a 240 company in good fi nancial health with a strong and stable business 220 . 200 Safe yield n 180 In the FTSE All-Share screen, only plastics manufacturer FTSE All-Share 160 RPC Group (RPC) still passes all eight tests. Recruiter 140 Page Group (PAGE) and engineering fi rmCostain (COST) 120 only pass seven tests now, with both companies falling 100 short on the cash conversion test. 2012 2013 2014 2015 2016 2017 n In the case of Page Group, which has had strong share Source: Thomson Datastream price momentum all year, this is the second of our Alpha screens (the other being our GARP screen in July) where it no longer scores perfectly. Screens are not a signal to sell a stock, but they are certainly a starting point to periodi- cally re-examine an investment case, which is a good discipline for stocks with cyclical characteristics. n Our FTSE Small Companies screen sees little change and no companies score perfectly. Shifting attention to Aim, the Property Franchise Group (TPFG), Park Group (PKG) and Fulcrum Utility Services (FCRM) still get per- fect marks against the screen. n MTI Wireless Edge (MWE) no longer passes all eight Aim tests, however. It now fails our interest cover test – which assesses how well interest obligations are covered Analyst: Algy Hall by operating profi ts and is an indicator of the sustainabil- [email protected] ity of a company’s dividend. This doesn’t mean the divi- Alpha Production Editor: Sameera Hai Baig dend is under imminent threat but again provides a signal to examine whether pay-outs are funded from operations. www.investorschronicle.co.uk telephone: +44 (0)20 7873 3000 email: [email protected] © The Financial Times Limited 2018. Investors Chronicle is a trademark of The Financial Times Limited. Registered offi ce: Number One, Southwark Bridge, London SE1 9HL 1 Large-cap dividend diamonds criteria Our large-cap screen is tilted towards companies that show signs of having stable prospects associated with dividend staying power. To help assess this, we use a measure of historic share price volatility against the wider market called beta. Betas of below one indicate that a stock has been less sensitive to market movements and suggest it could boast some defensive qualities. The large- cap Alpha dividend yield screen is conducted on all FTSE All-Share stocks using the following criteria: n A dividend yield higher than the median (mid-rank) average of all dividend-paying shares screened. n Dividend covered at least twice by earnings. n Earnings growth forecast in each of the next two financial years (ie dividend cover is not expected to dramatically fall). n Operating cash conversion of 100 per cent or more (ie earnings are being tuned into cash with which to pay dividends). n Interest payments covered at least five times by operating profits (ie interest payments on borrowings are not likely be a significant threat to maintaining dividend cover). n Return on equity of 12.5 per cent or more (i.e. an indi- cator that the business may be of decent quality [if the interest cover test is also met, it suggests high returns on equity are not overly dependent on high debt levels]). n A beta of 0.75 or lower. n No dividend cut in the past three years. Not many stocks pass such a stringent list of criteria. The ones that pass all the tests are listed at the top of the table, followed by those failing one test, then those failing two tests as detailed in the ‘Tests passed’ column. All stocks must pass the dividend yield test to feature in the table that follows. Special dividends are included in the yield calculation used by the screen, and where a special dividend has been paid, it is highlighted in the table’s ‘Special dividend’ column. While the primary ranking of the stocks is based on the number of tests they pass, inside each of these groupings, stocks are ordered according to their attractiveness based on a combi- nation of dividend yield and dividend cover. www.investorschronicle.co.uk telephone: +44 (0)20 7873 3000 email: [email protected] © The Financial Times Limited 2018. Investors Chronicle is a trademark of The Financial Times Limited. Registered office: Number One, Southwark Bridge, London SE1 9HL 2 Small-cap dividend diamonds criteria The small-cap Alpha dividend yield screen is more growth-focused than our large-cap screen, and is con- ducted separately on the FTSE All-Small and FTSE Aim All-Share indices, with the results presented in two separate tables. While the screen’s dividend yield test is more aggressive than the one used by our large-cap screen, the lower average yields from small-caps mean little difference in the absolute level of yield both screens require. The screen uses the following criteria: n A dividend yield among the top third of all dividend- paying shares screened. n Dividend covered at least one-and-a-half times by earnings. n Earnings growth forecast in each of the next two finan- cial years and average growth of 5 per cent or more (ie rising earnings to support dividend growth and maintain or improve dividend cover). n Positive free cash flow (ie a weak test that earnings are turned into cash with which to pay dividends). n Interest payments covered at least five times by operating profits (ie interest payments on borrowings are not likely to be a significant threat to maintaining dividend cover). n A three-year compound annual dividend growth rate of 5 per cent or more. n A three-year compound annual earnings growth rate of 5 per cent or more. n A market capitalisation of more than £10m (ie not severely illiquid). Not many stocks pass such a stringent list of criteria. The ones that pass all the tests are listed at the top of the table that follows, followed by those failing one test, then those failing two tests as detailed in the ‘Tests passed’ column. All stocks must pass the dividend yield test to feature in the table. Special dividends are included in the yield calculation used by the screen, and where a special dividend has been paid this highlighted in the table’s ‘Special dividend’ col- umn. While the primary ranking of the stocks is based on the number of tests they pass, inside each of these groupings, stocks are ordered according their attractiveness based on a combination of dividend yield and dividend cover. www.investorschronicle.co.uk telephone: +44 (0)20 7873 3000 email: [email protected] © The Financial Times Limited 2018. Investors Chronicle is a trademark of The Financial Times Limited. Registered office: Number One, Southwark Bridge, London SE1 9HL 3 Large-cap dividend diamonds selection (passing at least 6 out of 8 tests) Name TIDM Market Fwd NTM Dividend FY EPS FY EPS 3-month Net Cash/ Test Special Tests passed cap Price PE yield gr+1 gr+2 momentum Debt(-) Currency Failed dividend (out of 8) RPC Group LSE:RPC £2,888m 714p 9 3.9% 5.5% 6.6% -10.5% -1,156m GBP na NO 8 Taylor Wimpey LSE:TW. £5,462m 167p 8 9.3% 7.2% 2.0% -12.0% 496m GBP /CashConv/ YES 7 British American Tobacco LSE:BATS £79,077m 3,722p 12 5.2% 3.2% 8.9% -2.9% -46,199m GBP /DivGrth/ YES 7 Sirius Real Estate Ltd LSE:SRE £585m 58p 11 4.9% 49.4% -3.2% -11.2% -288m EUR /EPSGrth/ NO 7 Barratt Developments LSE:BDEV £5,488m 542p 8 7.9% 7.7% 4.4% -3.4% 166m GBP /CashConv/ YES 7 Playtech LSE:PTEC £1,676m 532p 9 6.1% -10.5% 20.9% -34.1% -359m EUR /EPSGrth/ NO 7 Int’l Consolidated Airlines, SA. LSE:IAG £13,854m 691p 7 3.8% 10.9% 6.1% 2.4% 670m EUR /DivGrth/ YES 7 Redrow LSE:RDW £1,975m 548p 7 4.0% 14.8% 8.2% -9.9% -35m GBP /CashConv/ NO 7 Jupiter Fund Mgmt LSE:JUP £1,888m 419p 13 8.0% -4.4% 2.3% -7.4% 364m GBP /EPSGrth/ YES 7 Hays LSE:HAS £2,952m 203p 16 4.3% 10.4% 9.8% 12.9% 123m GBP /CashConv/ YES 7 Tritax Big Box REIT LSE:BBOX £2,224m 151p 21 4.4% 9.9% 5.3% 0.8% -594m GBP /CashConv/ NO 7 Bellway LSE:BWY £3,585m 2,918p 7 4.2% 14.2% 4.7% -11.7% -131m GBP /CashConv/ NO 7 Forterra LSE:FORT £546m 274p 10 3.5% 7.4% 8.0% -11.9% -52m GBP /DivGrth/ NO 7 Babcock Int’l LSE:BAB £3,599m 713p 8 4.1% 2.1% 3.6% -18.3% -1,238m GBP /RoE/ NO 7 PageGroup LSE:PAGE £1,912m 610p 18 4.1% 20.4% 9.6% 13.1% 87m GBP /CashConv/ YES 7 Big Yellow LSE:BYG £1,491m 942p 22 3.3% 9.1% 7.7% 1.1% -345m GBP /CashConv/ NO 7 Inchcape LSE:INCH £2,869m 692p 11 4.0% -2.0% 3.5% -5.8% -164m GBP /EPSGrth/ NO 7 Costain LSE:COST £452m 425p 11 3.3% 8.1% 5.8% -8.3% 78m GBP /CashConv/ NO 7 Severfield LSE:SFR £231m 76p 11 3.4% 5.4% 8.1% -4.5% 33m GBP /RoE/ NO 7 Carnival LSE:CCL £32,626m 4,631p 13 3.3% 10.5% 11.7% -2.7% -8,826m USD /RoE/ YES 7 Telecom Plus LSE:TEP £798m 1,026p 17 4.9% 9.6% 12.3% -0.6% -11m GBP /DivCov/ NO 7 Dairy Crest LSE:DCG £734m 475p 13 4.8% -1.2% 4.3% -9.5% -271m GBP /EPSGrth/CashConv/ NO 6 De La Rue LSE:DLAR £486m 473p 11 5.3% 1.1% 7.3% -11.6% -48m GBP /DivGrth/RoE/ NO 6 Derwent London LSE:DLN £3,393m 3,042p 28 4.5% 12.3% 4.1% 1.3% -826m GBP /RoE/CashConv/ YES 6 INVESCO Perpetual UK Sm Cos IT LSE:IPU £173m 526p - 4.0% - - 5.0% 6m GBP /EPSGrth/Beta NO 6 LondonMetric Property LSE:LMP £1,281m 185p 21 4.3% 4.4% 4.4% -4.2% -617m GBP /IntCov/CashConv/ NO 6 BlackRock Frontiers Inv.