The UK will face an increasingly challenging dividend landscape in the next five years, but Evenlode has identified 10 stocks that will provide sustainable payouts.
The energy, mining, food retail, banking and utilities sectors have faced dividend cuts over the past year, with the outlook for payouts in the sector being “very mixed”, says the asset manager. It predicts UK dividends are likely to fall in the next year or two.
“A variety of factors have led to these cuts: industry difficulties, large capital investment requirements, poor cash generation and high debt levels. The recent UK referendum result may also affect the UK markets future dividend payments,” states the asset manager.
“At an aggregate market level, UK dividends are likely to fall over the next year or two. But many high quality, market-leading British businesses remain well placed to sustain and grow dividends over coming years.”
It has picked 10 stocks it believes will be able to sustain and grow their dividends over the coming years. These include Sage, Unilever, Fidessa, Page Group and Compass.
Completing the top ten list are Spectris, PayPoint, RWS Holdings, Victrex and Spirax Sarco.
The asset manager says it used a number of measures, including cashflow return on capital, cashflow cover, debt levels, dividend history and valuation to assess the sustainable payers.
It holds all the stocks in the Evenlode portfolio apart from Spirax Sarco, which it says does not meet the fund’s valuation metrics.
Stocks in detail:
Sage: Its products, such as accountancy software, become embedded in the day-to-day running of a business, creating a consistent revenue stream from subscription and support contracts. The company routinely converts profit to cash-flow, the balance sheet is strong. Sage has grown its dividend every year for the last 15 years.
Fidessa: Fidessa is a global market leader providing mission-critical software to investment banks, brokers and asset management firms. Long-term growth potential is good as customers look to improve efficiency, cope with regulation and compliance, and bring down costs. Fidessa deliberately operate a very prudent balance sheet with no debt and a strong net cash position. So free cash flow is regularly returned as ordinary and special dividends. Including its regular annual special dividend, the stock’s current dividend yield is 3.7 per cent.
Page Group: Page Group is a market-leading global recruitment company. Page has good medium to long-term growth potential and is an asset-light business with a low capital intensity, cash generation is strong through thick and thin. The company never borrows money, and its growth over the years has been driven by organic expansion rather than by acquisition. This consistent approach has enabled Page to take market share in more difficult times. The current dividend yield is 4.3 per cent, and Page has a record of returning excess cash to shareholders, most recently via a special dividend in 2015.
Unilever: Unilever owns a portfolio of global brands including Dove Soap, Lipton Tea and Magnum ice creams. This low ticket, repeat-purchase business model has helped drive dividend growth of +10 per cent per annum over the past 50 years and the company recently increased its dividend by +6 per cent. Unilever is globally diverse and has the financial strength to continue investing in its brands and distribution network to strengthen its competitive position and help drive long-term growth. The current dividend yield is 3 per cent.