Stocks to consider if the market totally loses its nerve around the General Election

  • 26 FTSE 100 stocks have increased their dividend every year since the financial crisis in 2007

  • Those firms have generated an average share price gain of 232%, compared to a 13% gain in the FTSE 100

  • Ashtead heads the pack with a share price return of 957.3%

  • Those firms have generated an average total return (capital gain plus dividends reinvested) of 505% against 64% from the FTSE 100

  • Bunzl generated the highest total return of 4169.8%

Russ Mould, investment director at AJ Bell, comments:

“A crunching 2.5% fall in the FTSE 100 welcomed yesterday’s announcement by the Prime Minister of a snap General Election on 8 June and further volatility is possible as the ballot draws nearer and the debate over issues such as Brexit, the economy and the Union becomes ever hotter.

“However, investors must consider whether the election and its potential outcome really changes the long-term cash-flow generating powers of the FTSE 100’s members before they decide whether to take evasive action – or use any sustained market weakness as a chance to buy what may be good assets going cheap.

“After all it is now nearly 10 years since the Great Financial Crisis broke in earnest and yet 26 FTSE 100 firms can still proudly say they have increased their annual dividend payments for each and every year since 2007, despite everything that has been thrown at them in the meantime.

“Using 14 April 2007 as a starting point those 26 firms have provided not just welcome income for investors but huge capital gains and stunning total returns.

Capital gains

“The 26 ten year dividend growers have generated an average share price gain of 232%, compared to a 13% gain in the FTSE 100. Only one of the 26 – SSE – has failed to beat the index over that time and 20 have seen their share price at least double.

 

Share price performance

Dividend CAGR

 

2007-17

2007-17

Ashtead

957.3%

26.5%

Micro Focus International

957.1%

29.1%

Intertek

342.3%

51.2%

Shire

334.6%

17.8%

Compass

331.8%

11.4%

DCC

302.1%

11.1%

Croda

295.8%

16.7%

Paddy Power Betfair

290.8%

16.0%

British American Tobacco

238.6%

9.9%

Scottish Mortgage

228.7%

3.8%

Bunzl

225.1%

8.4%

Associated British Foods

199.3%

6.5%

InterContinental Hotels

197.7%

12.9%

Sage

156.4%

7.3%

St. James's Place

132.6%

22.6%

Babcock International

127.8%

13.0%

Prudential

124.6%

8.6%

Diageo

121.7%

6.1%

Whitbread

118.9%

10.1%

Imperial Brands

103.5%

9.9%

Johnson Matthey

87.1%

8.0%

Sky

70.9%

8.0%

Vodafone

41.9%

4.8%

BAE Systems

38.3%

5.2%

Standard Life

13.5%

5.6%

SSE

-5.0%

4.2%

 

 

 

Average

232.1%

12.9%

FTSE 100

12.8%

 

Source: Thomson Reuters Datastream, Company accounts

Total Returns

“Consistent dividend growth has led to an average total return (capital gain plus dividends reinvested) of 505% against 64% from the FTSE 100. All 26 have done better than the headline index in total return terms over the past decade.

 

Total return

Dividend CAGR

 

since 14-Apr-07

2007-17

Bunzl

4169.8%

8.4%

Micro Focus International

1348.9%

29.1%

Ashtead

1215.6%

26.5%

Paddy Power Betfair

659.4%

16.0%

Croda

630.3%

16.7%

Compass

479.1%

11.4%

DCC

444.6%

11.1%

Intertek

422.8%

51.2%

British American Tobacco

412.4%

9.9%

Shire

356.2%

17.8%

InterContinental Hotels

297.7%

12.9%

Scottish Mortgage

291.5%

3.8%

Associated British Foods

263.1%

6.5%

Sage

245.5%

7.3%

Prudential

209.8%

8.6%

Imperial Brands

207.7%

9.9%

Diageo

199.2%

6.1%

St. James's Place

195.0%

22.6%

Babcock International

191.7%

13.0%

Whitbread

179.4%

10.1%

Vodafone

148.4%

4.8%

Johnson Matthey

137.2%

8.0%

Sky

135.7%

8.0%

BAE Systems

117.2%

5.2%

Standard Life

97.3%

5.6%

SSE

66.0%

4.2%

 

 

 

Average

504.7%

12.9%

FTSE 100

63.9%

 

Source: Thomson Reuters Datastream, Company accounts

“The simplest explanation for these stunning returns is that the share prices have grown into their dividend as the shareholder payout has gradually increased.

“Using their 14 April 2007 share prices and the dividends ultimately paid for 2007, the 26 names were offering a yield of 2.4% a decade ago.

“Yet using their 14 April 2007 share prices and the dividends paid for 2016 the 26 names were offering a yield of 7.6% - a figure that would have probably been enticing to most investors, especially given what has subsequently happened to headline interest rates and Government bond yields.

 

2016 yield on 14 Apr 07 share price

2007  yield on 14 Apr 07 share price

Micro Focus International

26.8%

2.1%

Ashtead

16.8%

1.6%

Paddy Power Betfair

10.8%

2.5%

Croda

11.1%

2.4%

British American Tobacco

10.7%

4.2%

Compass

8.8%

3.0%

Vodafone

8.7%

5.4%

Babcock International

7.2%

2.1%

Imperial Brands

8.0%

3.1%

St. James's Place

7.2%

0.9%

Intertek

6.8%

0.1%

Standard Life

6.1%

3.5%

DCC

6.2%

2.2%

SSE

5.8%

3.2%

Sky

5.8%

2.7%

Diageo

5.7%

3.2%

Bunzl

5.8%

2.6%

Prudential

5.5%

2.4%

Sage

5.5%

2.7%

InterContinental Hotels

5.2%

1.6%

Johnson Matthey

4.9%

2.3%

Whitbread

5.0%

1.9%

BAE Systems

4.6%

2.8%

Associated British Foods

4.0%

2.2%

Scottish Mortgage

2.7%

1.8%

Shire

2.1%

0.4%

 

 

 

AVERAGE

7.6%

2.4%

Source: Thomson Reuters Datastream, Company accounts

  • “Not all of the firms in the above list were in the FTSE 100 in 2006, with DCC, Paddy Power Betfair and St James’s Place being just three examples of firms who have risen through the UK’s corporate ranks. Yet many others have been mainstays of the benchmark, including Sky, Diageo and Imperial Brands.

  • “Equally, care must be taken, as the past is no guarantee for the future. In the past two years several firms who had a history of consistent dividend growth have failed to add to their record, with terrible share price consequences. Pearson is the latest example, after its decision to hold its pay-out for 2016 and cut it for 2017, following on from Tesco, BHP Billiton, Rio Tinto and Centrica, where share prices plunged once it became apparent that a golden run of dividend increases was coming to an end.

  • “It is therefore important to check earnings cover the dividend and make sure a company is not having to strain to keep its run going, as diverting cash to fund the distribution and away from investing in the day-to-day business could weaken a company’s long-term competitive position – and it strength here that ultimately provides the pricing power which in turn provides the consistent cash flow that makes the payments possible.

  • “Encouragingly, 15 of the top 26 dividend growers have dividend cover over 2.0 and a further 6 of them have cover of over 1.5.

 

2017E dividend cover

Shire

14.24 x

Ashtead

4.11 x

Prudential

3.02 x

Associated British Foods

2.92 x

Babcock International

2.86 x

Intertek

2.75 x

DCC

2.70 x

Johnson Matthey

2.57 x

Whitbread

2.55 x

Bunzl

2.44 x

InterContinental Hotels

2.21 x

Micro Focus International

2.10 x

Sage

2.05 x

Compass

2.05 x

Paddy Power Betfair

2.03 x

BAE Systems

1.99 x

Croda

1.73 x

Diageo

1.68 x

Sky

1.66 x

Imperial Brands

1.56 x

British American Tobacco

1.53 x

Standard Life

1.37 x

SSE

1.31 x

St. James's Place

1.06 x

Scottish Mortgage

0.63 x

Vodafone

0.52 x

Source: Thomson Reuters Datastream, Company accounts

“This goes to show:

  1. “That investing is all about patience

  2. “That investing is all about trying to pick well-run, well-financed companies with sound business models rather than trying to second-guess near-term events or macroeconomic and political trends

  3. “That income investing is not just about finding the fattest yield and harvesting the dividends but spotting firms capable of consistent dividend growth when it comes to generating the best total returns from a portfolio of shares.”