Register to get unlimited access to Citywire’s fund manager database. Registration is free and only takes a minute.

The £72.4bn opportunity: which FTSE firms offer best dividend prospects?

Financial information firm Markit expects FTSE 350 firms to payout £72.4 billion in its annual dividend report and highlights where it believes the best opportunities lie across 18 sectors.

£72.4 billion payout

Looking ahead to the company reporting season Markit outlines its expectations for payouts by large and midcap UK companies. The financial information firm expects FTSE 350 firms to pay £72.4 billion in ordinary dividends in 2014, an increase of 4.5% on the previous year.

The biggest increases are expected from the banks, housebuilders and industrial goods and services sectors, while cuts and suspensions are predicted in the mining sector.

£72.4 billion payout

Looking ahead to the company reporting season Markit outlines its expectations for payouts by large and midcap UK companies. The financial information firm expects FTSE 350 firms to pay £72.4 billion in ordinary dividends in 2014, an increase of 4.5% on the previous year.

The biggest increases are expected from the banks, housebuilders and industrial goods and services sectors, while cuts and suspensions are predicted in the mining sector.

Biggest expected payments

The five companies above account for 31% of ordinary dividend pay outs in the FTSE 350 (excluding the special distribution from Vodafone). Oil majors BP and Royal Dutch Shell are offering attractive yields. BP increased its dividend for Q3 2013 as a sign of confidence in the outlook for the business.

Markit expects HSBC Holdings to be a significant contributor this year and predicts the bank to increase its payout by 13%. It believes the bank is likely to maintain a pay-out ratio towards the top of its 40-60% range due to increased earnings and its strong balance sheet.

Vodafone still makes the list despite the reduction in its per-share pay out which will take effect at the time of the final results in May. Markit predicts a modest 5% increase in GlaxoSmithKline’s full-year dividend as earnings growth continues to slow as a result of the patent cliff.

Biggest expected changes

A return to the dividend list is expected when Lloyds Banking announces its final results. At the Q3 stage, management said that discussions had commenced with regulators on conditions for dividend resumption.

Among the home builders, Redrow and Berkeley Group Holdings are likely to deliver impressive increases on strong trading. Redrow resumed dividend payments last September and Markit expects the company to pay a FY14 dividend of 3.3p (gross), reflecting strong momentum in the earnings projections.

The following slides reveal Markit's forecast for dividends for the 18 key sectors in the FTSE 350, highlighting the opportunities and the areas to avoid.

Oil & Gas

Focused on capital discipline and shareholder returns

(Markit says) Large and mid-cap companies in the sector are expected to distribute almost £13 billion in dividends to shareholders for the current fiscal year, up around 4.5%.The biggest payers are oil majors BP and Royal Dutch Shell, which are expected to distribute over £8.76 billion between them.

There have been concerns over the Capex needs of oil majors and sustainability of their dividends. However some analysts are saying that negative sentiment may have peaked and HSBC recently put out a positive note saying that cash flows were likely to be better than anticipated by some commentators. The big names in the sector have been reigning in spending and are focused on asset disposals. The importance of the dividend has been emphasised in almost every conference call and results presentation.

BP had previously guided towards annual increases in its pay out after the rebasing of its dividend following the Mocando spill. In October the company surprised investors by raising the dividend by USD(c) 5 and saying that the board will review the payment with the Q1 & Q3 results in future.

We expect the upcoming quarterly payout from Royal Dutch Shell to be held flat, in keeping with its policy. Looking beyond that we expect very modest increase of Eur 1 (c) in the quarterly payout. The company is planning a strategy update in March and should update on measures to address the shortfall in operating cash flow.

BG Group issued a disappointing production report in October. Nevertheless we think the company will be able to raise its full-year dividend by 10% as its well covered by earnings and the long-term outlook is good due its strong asset base.

Among the services companies we are optimistic that John Wood Group and Amec will deliver increases of over 20% and 15% respectively. Both have well covered dividends and Amec’s management have said that they are ‘progressively increasing the dividend payout and see that trend continuing’.


Click and collect

In recent years the technology sector has moved from being predominantly populated by growth stocks to one which is an increasingly important source of income. Interim payments were up sharply across the sector with increases from Arm (26%), Pace (28%), CSR (18%) and Laird (24%).

The decrease in tech sector pay outs for the current financial year listed in the sector table is due to exceptional special dividends last year. Adjusting for this, payments are expected to rise and there could once again be special distributions unveiled during reporting season.

Arm Holdings has increased the dividend by 20% or more with each of the past seven results announcements. Last year the CFO said that ‘the plan of record at the moment remains a gradually increasing pay out ratio with the dividend growing faster than earnings.

Amongst the mid-cap names we are projecting full-year increases from Laird and Pace of 26% and 24% respectively. This is based on the interim payment and target pay out splits of one-third and two-thirds, supported by earnings and cash flows.

Aveva Group should match the increase of around 15% it delivered for each of the past two fiscal years, based on the consensus view from analysts on earnings and cash-flows. Our estimate for a 26% increase in Telecity’s dividend is based on the company’s guidance for a payout ratio in the region of 20% to 25% which will then grow at least in line with earnings.


Return to healthy pay outs

Following cuts in the interim payments from Aviva and RSA, we anticipate reductions in their respective full-year dividends. The past 12 months have been very tough for RSA and we expect the company not to pay a 2013 final dividend as the insurer needs to strengthen its balance sheet. Last year RSA was downgraded by S&P after issuing three profits warnings within six weeks, linked to capital injections in its Irish business and adverse weather conditions.

In contrast, we are projecting growth of 50% in the pay outs of St James’s Place and Direct Line. For the first half of 2013 St James’s Place reported a 53% jump in pre-tax profit and a 60% increase in underlying cash. The management are confident that they can deliver a 50% increase in the final dividend.

Direct Line and Esure should be on healthy growth trajectories after recently initiating payments. Increases of 10% to 20% are projected for, Legal & General and Old Mutual. Admiral is expected to slow the pace of growth from an average of 15% in the past four years to 5% due lower growth in its UK Car business. Modest increases are expected from Resolution, Amlin and Catlin.


Better outlook suggests improving pay outs

During 2013 the picture steadily improved for banking stocks as the level of uncertainty around capital requirements decreased.

There has been a lot of interest in the timing of Lloyds Banking’s return to the dividend list. Discussions with regulators on the timetable and conditions for a resumption have already begun and we anticipate a FY13 final dividend of 1p (a payout ratio of around 20%). Factors driving our forecast include the fact the bank is back in the black having reported statutory profits before tax of £1.7 billion for the first nine months of 2013.

Barclays said it plans to maintain the dividend per share at the same level as last year but plans to double its payout ratio from 2014. Last September the bank launched a rights issue of £5.8 billion to bolster its leverage ratio in order to reinforce its balance sheet and meet the capital requirements.

On average we expect growth of 8% in declared pay outs from UK banks.

HSBC Holdings is likely to be the only big UK bank to deliver a double-digit increase at 13%. We see Standard Chartered announcing a modest 2% rise as a slowdown in emerging markets has squeezed margins. The strong balance sheet combined with exposure to emerging markets support shareholder returns for both banks in the longer term.

Construction & Materials

Rebuilding cover

Having kept their interim dividends flat we are expecting full-year pay outs for the biggest companies in the sector, CRH and Balfour Beatty, to remain flat year-on-year. Balfour reported weak first-half numbers as worsening performance in Australia and slow UK construction took their toll. CRH also said that it expects the operating environment to remain challenging.

Unsurprisingly the outlook is better for companies involved in UK housing and Galliford Try is likely to increase its dividend sharply when full-year results are posted. Although earnings are recovering for many players in this sector we expect dividend growth to lag earnings as they rebuild cover in the near term.


Healthy balance sheets support growth

The average level of leverage among companies is quite low (net debt / Ebitda at only 0.7x last year) so there is flexibility to increase pay-out. Consensus free cash flow cover looks healthy and also supportive of robust dividend growth.

Last year average cover was around 2.3 times free cash flow and, based on Markit estimates along with consensus FCF, is expected to slip to around 2x from next year due to higher capital expenditures and pricing pressure.

Alent will lead growth in the industry as the company is expected to pay its first full year dividend since the demerger with Cookson. We expect Synthomer to grow its pay-out ahead of earnings in the medium term to meet its target of a reduced cover ratio by 2015.

We see blue-chip companies Johnson Matthey and Croda, delivering a 10% and 5% increases respectively. The strong balance sheet enables Johnson Matthey to support the reduced free cash flow this year.

Despite a fall of 10% in pre-tax profits at the half-year stage, due to lower chromium sales, we estimate Elementis will raise its pay out by 5% as the earnings projections point to a stronger second half. Thanks to its solid balance sheet and good earnings growth, we expect the company to propose a special distribution.

Basic Resources

Index Dropouts

The removal of Vedanta from the FTSE 100 in the December reshuffle meant there was a clean sweep with a mining stock falling out of the index at each of the quarterly reviews in 2013. The basic resource sector was best avoided by income hunters in recent months and the worst may not yet be past. The precious metals miners were particularly badly hit by lower prices and disruption to operations. African Barrick Gold and Fresnillo cut their half-year payments by 75% and 68% respectively.

We expect the total payout across the sector to be down around 11% year-on-year, as cuts at the interim stage are likely to be followed by similar reductions when final results are published. Suspensions from Evraz, Kazakhmys and Hochschild Mining are likely to continue in the near term. We see African Barrick Gold paying a much lower final dividend for the year following the rebasing at the interim stage. There will be no dividend from Fresnillo when the final results are published as it accelerated the payment ahead of the introduction of a new dividend tax in Mexico.

The big miners have come under pressure from shareholders with regard to capital discipline and returns. Higher iron ore prices and demand from China should be supportive of cash flows and payments in 2014.

Having rebased pay outs lower and rebuilt balance sheets during the downturn, we expect Rio Tinto and BHP Billiton to post low single-digit increases in their full-year dividends. Rio Tinto’s CEO Sam Walsh told investors that paying down debt will be a priority in 2014 and that the company plans to reduce spending by around one-fifth. Anglo American has cautioned investors that they expect a tough operating environment in 2014. We don’t expect any increase in the dividend when final results are published in February but a cut seems unlikely.

On a positive note, there has been a turnaround at Lonmin, which expects to be free cash flow positive this year and may return to the dividend list in the second half of 2014.

Travel & Leisure

Positive outlook for hospitality and gaming

The Travel & Leisure sector is currently yielding 3.2% based on our estimates and the outlook has been steadily improving. Compass, Rank Group and Restaurant Group are expected to deliver dividend growth of around 10%, in line with projected earnings increases from analysts. We are optimistic about the prospects for IHG’s pay-out thanks to solid cash flow management.

In the travel industry, Tui Travel and Easyjet are expected to keep raising their pay-outs. After two years of significant hikes, Easyjet is likely to post normal dividend increases of around 12% in the next three year’ reflecting the earnings projections.

The growth of online gaming means the sector has good metrics with increasing revenue feeding into strong balance sheets and healthy cash positions. Cash flow generation is strong with dividends well covered by free cash flow (around 2 to 2.5 times).

We see a 41% jump in Betfair’s pay-out following the new pay out ratio target of 40% of underlying profit after tax. Strong growth is also anticipated from 888 Holdings and William Hill. Betfair and 888 have the margins to deliver strong dividend increases thanks to comfortable cash positions and William Hill aims to reduce its earnings cover.

Ladbrokes, Playtech and Bwin.Party are likely to disappoint with no increase to their pay outs. The same is expected from transport companies Go-Ahead and National Express. We expect a 33% decrease from FirstGroup following restructuring.


Pick 'n’ Mix

Trading conditions remain challenging for retail stocks and the Christmas period will be critical. In December the Footfall Monitor, from the British Retail Consortium and Springboard, reported high street footfall was down 3.4% from September to November, although this may have been disrupted by the increased popularity of ‘Black Friday’ and ‘Cyber Monday’.

Tesco managed to avoid a profit warning before Christmas but the likelihood is that its dividend will remain flat, as has been the case for each of the past two years. In real terms this equates to a decline of about 3% pa. The situation for peers such as Sainsbury and M&S is similar, with the latter expected to be free cash flow negative post dividend in FY14. Many companies in the sector are reshaping their business leaving little prospect of growing pay outs in the near term.

In contrast, we should see 10% increases from Morrison’s and also from Next based on their committed targets. A similar increase is projected from WH Smith where a strong management team have an admirable record of delivering growth.

Companies in this sector which may surprise on the upside in terms of pay outs during 2014 are those who can benefit from increased mortgage approvals and housing starts. Improved confidence in the recovery should also benefit car dealer Inscape. We are forecasting an18% increase in its full -year payout and see potential for an upside surprise.

Industrial Goods

Attractive yields and solid increases

As a broad sector the dividend outlook for Industrial Goods is mixed. Though some stocks have low yields, most are forecast to post significant increases. Our estimate for Xaar was revised upward to show a 150% hike, which would still be well covered if reported earnings match broker estimates. At the half-year stage, profit before tax more than trebled, free cash flow turned positive and the net cash position jumped from £15.7 million to £49.4 million

Based on its new policy of reducing the dividend cover, we forecast growth of 50% in the dividend from Howden Joinery. New FTSE 100 constituent, Ashtead is expected to post a 37% increase, based on current earnings projections. At the half-year stage, the company reported a 49% rise in pre-tax profits, driven by the growth in its Sunbelt division in the US.

Among large cap stocks, we expect growth of around 10% from Aggreko, Bunzl, Capita, Intertek, Rolls-Royce, Weir and Wolseley. Based on its plans to reduce the dividend cover ratio we anticipate a 26% jump in the dividend of Travis Perkins.

Chemring’s dividend is likely to fall by 20%, taking into account the new target of a dividend cover by three times earnings and analysts expectations for earnings. G4S, Hays, Homeserve, Michael Page and Premier Farnell are expected to hold pay outs flat.

Finally, Royal Mail intends to propose a final dividend, to be paid in July 2014, of £133 million. This amount is approximately two-thirds of the full-year distribution of £200 million that would have been proposed if the company had been listed throughout 2014.


Growing concerns

The utilities companies were in the spotlight last autumn following the debate on UK energy prices.The political pressure to reduce the increasing bills is growing significantly with Labour leader, Ed Miliband, having announced a plan to freeze power and gas prices until 2017 if elected in 2015. Lots of uncertainties remain but SSE reassured investors by saying that it is confident in delivering dividend growth ‘despite the intensifying political debate’.

As a defensive sector, with strong cash flows, Utilities stocks have been an important source of income for investors in recent years. While yields may be attractive (averaging 5.5%), the companies are facing three significant challenges: uncertainty surrounding regulatory changes (water companies), high capital investment requirements and, low levels of dividend cover (negative in some instances).

Excluding Drax, average growth will reach 4% for the main players in the industry. Despite its strong balance sheet and a high free cash flow cover, Centrica will lag the sector with a modest 2% rise this year. In November 2013, we downgraded our forecasts following the new guidance for flat adjusted earnings compared to last year due to challenging market conditions particularly in business energy supply.

On the back of its new dividend policy and OFGEM’s agreement we think National Grid is likely to deliver a 3% increase, though leverage remains a concern in the medium term. Our forecast for Drax is a reduction of 47% in its dividend. This mirrors the projected fall in earning from a consensus of analysts who cover the stock. The company stated that 2013 EBITDA will adversely impacted by the increasing costs of carbon.

Financial Services

Volatility persists

The Financial Services sector offers an average yield of 3.8% and has faced volatile markets and risks related to uncertain regulatory reforms. We expect the hedge fund Man Group will cut its dividend by 72%, reflecting the new policy of passing on the company’s management fees to investors. Europe’s biggest hedge fund faces challenging trading conditions and falling funds under management.

On the other hand Jupiter Fund Management and Schroders are expected to raise pay outs by 31% and 23% respectively. At the half-year stage, Jupiter reported an 89% increase in profit before tax and assets under management grew by 11%.

Healthy increases of around 16% are also anticipated in the pay out of Hargreaves Lansdown and International Personal Finance. Both companies reported increased earnings and assets under management reported in their last trading updates. London Stock Exchange and ICAP are likely to disappoint with a modest rise of around 3%.


Tune in for income

New disruptive technologies are changing the ways in which companies can deliver content and charge for advertising. This is altering the business models of many players in this sector. The overall increase for the sector payout is held back by modest moves by big names such as BSkyB, which is facing increased competition.

When looked at individually we see a likelihood of big increases from some companies such as Rightmove, which is expected to increase the pay-out for the current year by over 20% following a 22% jump in the interim payment. While the yield is modest there is strong growth potential and the possibility that the dividend may exceed our projection considering its cash generation and trading outlook. is also expected to increase its full-year dividend by over 20% with a payout that’s underpinned by strong cash flows and a healthy balance sheet. There is scope for upside surprise and potential additional special payments.

Full-year dividend hikes of more than 20% are also predicted for WPP, based on the company’s guidance for an increased payout ratio, and for ITV which already raised the interim pay out by 22%.

Personal & Household Goods

Upwardly mobile

Across the Personal & Household Goods sector we predict an 8% increase, but component sub sectors have very different characteristics.

The main driver is the Homebuilding industry where trading conditions have dramatically improved over the last 12 months thanks to the governments ‘Help to Buy’ incentive. Improved profitability and higher margins are driving positive cash flows and bigger returns to shareholders. Several companies in the sector have recently outlined plans to resume or aggressively increase pay outs. Overall we expect this subsector to double its payout for the fiscal year.

We’re forecasting generous dividend increases from Redrow, Taylor Wimpey and Barratt Developments. Our team also expect Crest Nicholson to initiate payments and are predicting hikes of around 40% from Bovis, Bellway and Berkeley Group. Building on growth of 16% in the interim pay out, we forecast Taylor Wimpey will triple its dividend in 2014. The company resumed payments last year at a low base allowing room for rapid increases.

Traditionally a defensive sector, Tobacco companies currently yield around 5.5% on average. Since 2008, British American Tobacco and Imperial Tobacco have delivered steady growth of around 12% p.a. in their payouts. However, this year BAT looks set to slightly underperform its competitor with an expected increase of 7% (vs. 11% for IMT) as the company has less headroom to increase.


Lower Vodafone pay out results in sector decrease

The meeting to approve the details of the Vodafone return of capital is scheduled for 28 January and trading in the new post-consolidation shares will commence on the 24 February. The guidance for the FY14 final dividend is a significant cut when applied to the current number of shares outstanding. We expect the company to provide an update on the future policy in the early part of the year. It should be well positioned to grow the dividend progressively from the new lower base in FY14/15.

The reduction in Vodafone’s pay out accounts for the decrease in the sector for the year. Excluding this, the performance is better with BT is targeting a dividend hike of 10 - 15% and smaller cap names TalkTalk and KCom promising increases of 15% and 10% respectively. BT has guided to normalised free cash flow in FY14/15 of around £2.6 billion, with payments of £0.3 billion needed for the pension this leaves the dividend well covered.

Cable & Wireless Communications is likely to hold the pay out flat as it looks to rebuild cover even at a new lower rebased level. Shareholders shouldn’t expect Telecom Plus to match the 23% increase announced with its interim results when the final dividend is declared in May. The company has been reweighting payments to move towards a more even split between interim and final dividends in future.


Robust yields in the near-term, challenges beyond

Companies in this sector have a good record of progressive increases based on strong cash flow generation. Although they face lower revenues, large pharmaceutical companies still have big cash balances and management teams which are committed to shareholder returns. Our forecast is for average growth of 10% across the sector, though there are significant disparities.

Hikma and NMC Health are expected to increase dividends by 50% and 27% respectively. We also see a 15% rise from Shire and 10% increases from Genus and Synergy Health.

Smith & Nephew is likely to slowing the pace of increases from 50% last year, when the dividend was rebased higher, to just 5%. Based on projected revenues and earnings we are forecasting a maintained dividend from AstraZeneca, though this still results in a yield of 5.5%. The company faces lower earnings due to the patent cliff and a weak product pipeline.

Food & Beverage

Liquid Gold

We expect double digit growth in the full-year pay outs of Diageo and SABMiller, with increases of 10% & 12% respectively. Diageo has a strong record of steady increases which it looks well placed to maintain.

SABMiller’s management ended their H1 presentation by saying that they see ‘substantial long-term revenue and margin opportunities ahead’. Drinks makers are benefitting from growing global demand for premium brands, particularly in Latin America and Africa.

Although Unilever delivered disappointing Q3 results the company said it is expecting a better Q4 and restated guidance of ‘growth ahead of markets’ and ‘steady and sustainable’ margin increases for the year. We expect the company will pay a Q4 dividend at the same level as Q3 and for the remainder of 2014 increases will be minimal as the company looks to get back to the target payout ratio of 55% – 60%.

Among the mid caps the expectation is for low single digit increases, in line with projected moves in earnings and cash flow.

The exception is Greencore Group where we are forecasting a 10% increase in the upcoming FY14 interim pay out. The company reported a strong performance for FY13 with operating profit up 8.1% and adjusted EPS up 13.3%. Net debt was lowered and the pension deficit reduced. The outlook for next year appears good with growth opportunities and cash generation in the UK business.

Real Estate

High rising mid-caps

The Real Estate sector is likely to provide a yield in line with index average and dividends are expected to increase by 9% due to increased earnings and improved free cash flow cover. We expect little in the way of increases from big players such as British Land and Land Securities. British Land aims to rebuild cover before returning to dividend growth and has an eye on the gearing ratio.

After two years of transforming its student accommodation business, Unite is now delivering strong dividend increases. Last year the company raised its dividend by 129% and we forecast a 45% jump for this year. Equity analysts believe the company has strong cash generation and an improving operating return.

Big Yellow is also expected to provide a boost with a 50% jump as the company aims to increase its pay out ratio from 60% to 80%.

Finally, we anticipate growth of around 10% in the pay outs of Workspace and St. Modwen Properties.

Citywire TV
CIO Tapes 2: two warnings and a lot of optimism

CIO Tapes 2: two warnings and a lot of optimism

Our group of leading asset management CIOs see a lot of opportunities – and overseas investors are buying UK too

Play Wealth Manager Retreat 2017: size isn't everything

Wealth Manager Retreat 2017: size isn't everything

We asked our delegates at the Wealth Manager Retreat what they think about the recent wave of consolidation in the industry.

1 Comment Play CIO Tapes - part 3: 'passive funds are anti-capitalist'

CIO Tapes - part 3: 'passive funds are anti-capitalist'

Citywire recently gathered three of the UK's leading fund investment heads to discuss their hopes, fears and the issues that their jobs throw at them daily.

Read More
Your Business: Cover Star Club

Profile: Thomas Miller explains its post-restructure plans

Profile: Thomas Miller explains its post-restructure plans

Thomas Miller Investment’s (TMI) head of wealth Matt Phillips has strong opinions about many things

Wealth Manager on Twitter