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10 stocks that could spring a dividend surprise

We asked 10 leading UK fund managers for the stocks they believe could deliver better-than-expected dividends.

by Jonathan Yarker, Daniel Grote on Aug 04, 2015 at 15:18

Click through the slides to find out 10 stocks that some of the top UK fund managers believe could deliver better-than-expected dividends to shareholders.

If you'd like to receive news alerts on any of the stocks, funds or fund managers mentioned, click on the links below to add them to your favourites.

Key stats
Market capitalisation£59,922m
No. of shares out71,536m
No. of shares floating60,581m
No. of common shareholdersnot stated
No. of employees84490
Trading volume (10 day avg.)133m
Turnover£19,211m
Profit before tax£1,187m
Earnings per share1.64p
Cashflow per share4.74p
Cash per share70.66p

*Correct as at 31 Jul 2015

Lloyds (LLOY)

Stephen Message

Old Mutual UK Equity Income

Lloyds resumed dividend payments earlier this year with a token, but symbolic, 0.75p payout, and has followed that with an interim payment of the same amount announced in last week's half-year results.

The bank has also suggested it could also return capital to shareholders through further special dividends or share buy-backs.

Citywire AAA-rated Message believes investors are underestimating the speed at which dividend payments will rise from this small level.

'It has been a long rehabilitation story for Lloyds. The dividend was only 0.75p, but people don't realise that accounts for just over £500 million of capital,' he said.

'It will get bigger and they will become one of the biggest income payers in the market. They have certainly had some legacy issues to deal with, but those issues are now just that: legacy issues. People are missing a trick on how fast this dividend could grow.'

Key stats
Market capitalisation£17,445m
No. of shares out8,137m
No. of shares floating8,113m
No. of common shareholdersnot stated
No. of employees506984
Trading volume (10 day avg.)17m
Turnover£62,284m
Profit before tax£-5,694m
Earnings per share-70.24p
Cashflow per share-51.43p
Cash per share33.95p

*Correct as at 31 Jul 2015

Tesco (TSCO)

Matthew Hudson

Schroder UK Alpha Income and Schroder UK Opportunities

Tesco's horrendous 2014 culminated in the supermarket scrapping its final dividend payment, but Citywire AAA-rated Hudson believes a resumption of payouts could be on the crads in the next year.

'At the moment we have a few stocks with low or zero yields and we are very happy to hold these,' he said.

'One example of this is Tesco. It is not paying a dividend right now but over time as it goes through restructuring process, over the next 12 months or so, we could see it pay a dividend. Historically supermarkets have consumed a lot of capital but they are also capable of sustaining good dividends.'

Key stats
Market capitalisation£184m
No. of shares out39m
No. of shares floating34m
No. of common shareholdersnot stated
No. of employees411
Trading volume (10 day avg.)m
Turnover£120m
Profit before tax£15m
Earnings per share37.60p
Cashflow per share42.71p
Cash per share50.38p

*Correct as at 31 Jul 2015

STV (STV)

Scott McKenzie

Saracen UK Income

STV paid its first dividend in seven years last year after the broadcaster of ITV in Scotland finally brought debt acculumated from a series of ill-fated acquisitions under control.

The company's 2p payment for its 2013 financial year was followed by total dividends of 8p for 2014, and McKenzie is backing the company to keep delivering.

‘STV, the Scottish ITV as it were, is a company I have owned for years and they have started to grow a fairly healthy dividend. I think it could surprise,’ he said.

‘Going back five years, they got into trouble by buying up radio stations that didn’t work out well for them and they ended up getting new management. They made it a much stronger company and of all the media companies I have looked at, STV is probably the most conservative.’

Key stats
Market capitalisation£292m
No. of shares out12m
No. of shares floating2m
No. of common shareholdersnot stated
No. of employees393
Trading volume (10 day avg.)m
Turnover£74m
Profit before tax£18m
Earnings per share154.26p
Cashflow per share159.29p
Cash per share7.87p

*Correct as at 31 Jul 2015

S&U (SUS)

Mark Slater

MFM Slater Growth, MFM Slater Recovery and MFM Slater Income

Citywire AA-rated Slater is waiting to see how much cash S&U will return to share holders after the car finance specialist, currently on a forward yield of 3.1%, sold its home credit business this month.

‘It is an old London business that has just sold off its home credit division, so they can focus on motor financing,’ he said.

‘Part of the capital from this sale will be reinvested but part of this will go back to shareholders. We just don’t know the details yet. The car lending business is growing very fast anyway, so they are already generating a lot of cash.'

Key stats
Market capitalisation£39,018m
No. of shares out11,466m
No. of shares floating2,494m
No. of common shareholdersnot stated
No. of employees109200
Trading volume (10 day avg.)8m
Turnover£13,079m
Profit before tax£-25m
Earnings per share-0.22p
Cashflow per share10.07p
Cash per share653.00p

*Correct as at 31 Jul 2015

Royal Bank of Scotland (RBS)

Tineke Frikkee

Smith & Williamson UK Equity Income Trust

Royal Bank of Scotland may have disappointed investors hoping for a dividend next year but Frikkee is hoping for strong payouts to emerge eventually in the move towards becoming 'a better bank'.

RBS, which hasn't paid a dividend since the financial crisis, announced last week it wouldn't be in a position to resume payouts until the first quarter of 2017 at the earliest.

But today's news that the government has started to sell off its stake in the bank has been hailed as a watershed moment.

Speaking before last week's first-half results and the news of the government stake sale, Frikee said: 'It will be interesting to see what type of bank RBS will become. Will it be simple like Lloyds or mixed like HSBC? There are a lot of different models out there. But there is no doubt it will be a better bank than it used to be.'

Key stats
Market capitalisation£2,148m
No. of shares out458m
No. of shares floating422m
No. of common shareholdersnot stated
No. of employees459
Trading volume (10 day avg.)1m
Turnover£388m
Profit before tax£126m
Earnings per share27.17p
Cashflow per share31.76p
Cash per share65.26p

*Correct as at 31 Jul 2015

Jupiter Fund Management (JUP)

Stephen Bailey

Liontrust Macro Equity Income and Liontrust Macro UK Growth

Fund group Jupiter is committed to paying special dividends where possible after a 11.5p payment announced earlier this year following the sale of its private client business.

The special dividend took total payouts for the 2014 financial year to 24.7p, with total ordinary dividends up 4.8% on the previous year at 13.2p. Jupiter is currently trading on a forward yield of 5.4%.

'They have more than enough cash, over and above what they need to run the business and pay their dividends. They have a stated intention to pay special dividends if they can,' said Citywire AA-rated Bailey.

‘Asset managers are an interesting place to be invested at the moment. Look at the government pension consultation and the cost of pension tax relief being around £50 billion every year. There is a suggestion they could shift this to tax paid contributions such as ISAs, so a lot of insurers would have to broaden out their offering.’

Key stats
Market capitalisation£1,385m
No. of shares out1,205m
No. of shares floating1,181m
No. of common shareholdersnot stated
No. of employees114370
Trading volume (10 day avg.)2m
Turnover£6,051m
Profit before tax£75m
Earnings per share6.23p
Cashflow per share40.83p
Cash per share34.90p

*Correct as at 31 Jul 2015

FirstGroup (FGP)

Chris Watt

Jupiter UK Alpha, Jupiter Growth & Income and Jupiter Responsible Income

Last year, FirstGroup was forced to cancel its dividend as the bus and rail company struggled to reduce its debts. A £615 million rights issue two years ago hasn't proved enough to help the group recover from its spending excesses before the financial crisis.

But Citywire AAA-rated Watt believes FirstGroup bosses are placing the business on the right track towards paying out hefty dividends.

‘This company acquired [US bus group] Laidlaw in 2007, the biggest operator of yellow school buses, and then they had too much debt as a result,’ he said.

‘They had to starve themselves as there was too much capex and they got themselves into a real state. They now have a management team focused on turning around the profits of the business,' he added.

Key stats
Market capitalisation£787m
No. of shares out137m
No. of shares floating135m
No. of common shareholdersnot stated
No. of employees6183
Trading volume (10 day avg.)m
Turnover£1,515m
Profit before tax£-39m
Earnings per share-29.13p
Cashflow per share3.30p
Cash per share59.54p

*Correct as at 31 Jul 2015

Dairy Crest (DCG)

Jamie Forbes-Wilson

AXA Framlington Blue Chip Equity Income

Dairy Crest investors could be in line for a bumper payout from the company's sale of its milk business to Muller, as it looks to focus on its cheese and spreads operations.

The company has been steadily growing dividends and currently yields 3.8%. ‘This deal, if completed, would see Dairy Crest have a slimmed down employee base, smaller geographic footprint and a much more concentrated business focusing on core products,' said AA-rated Forbes Wilson.

'The establishment of a whey facility that would allow Dairy Crest to enter the baby formula market could provide another boost. This is a huge opportunity for them. So this combination of factors means they could grow their dividend quite significantly.'

Key stats
Market capitalisation£3,170m
No. of shares out1,766m
No. of shares floating1,606m
No. of common shareholdersnot stated
No. of employees12814
Trading volume (10 day avg.)2m
Turnover£4,753m
Profit before tax£118m
Earnings per share6.63p
Cashflow per share7.83p
Cash per share8.38p

*Correct as at 31 Jul 2015

Booker (BOK)

Simon Brazier

Investec UK Alpha

Shares in Booker this week reached their all-time high and despite an underwhelming 2014 for the cash-and-carry operator's investors, the long-term returns banked by investors are impressive.

Booker is up by more than 300% over five years as the business has continued to grow. And A-rated Brazier is just as impressed with how the company has matched that success with growing dividends.

'Booker is not often thought of as an income stock, however it very much should be. In 2009 Booker was yielding 3%, since then it has grown its dividend by c.270% in five years and total shareholder return by nearly 600%,' he said.

'In fact, because of dividend growth, the current dividend represents a yield of close to 12% on the 2009 share price. We see further growth of the regular dividend and of the additional dividend as achievable into the future.'

Brazier added: 'Booker is a company which has been able to grow without the need for capital outlays and is thus highly cash generative. It has also been able to carry out excellent M&A, further accelerating the growth of cash flow and dividends.'

Key stats
Market capitalisation£4,594m
No. of shares out137m
No. of shares floating125m
No. of common shareholdersnot stated
No. of employees1647
Trading volume (10 day avg.)m
Turnover£2,120m
Profit before tax£424m
Earnings per share276.98p
Cashflow per share278.74p
Cash per share318.34p

*Correct as at 31 Jul 2015

Berkeley (BKGH)

Chris Wright

Premier Optimum Income and Premier Ethical

Berkeley already boasts strong dividends, with a 4.4% forward yield, and AAA-rated Chris Wright believes the house builder could deliver substantial growth in payouts.

'The company has guided to £2 billion of profits over the next three years and 433p of dividends. To do this Berkeley needs to generate £7 billion of revenues and the order book already stands at £3.9 billion. So, the company needs to generate only an incremental £1 billion of sales per annum,' he said.

'So, we have a mix of better than indicated sales and profits, along with a lower desire to invest in land. This leads to an explosion in cash flow, an upping of dividend expectations.'

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