5 British Dividend Growth Stocks

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Includes: BZLFF, CMPGF, DEO, SPXSF, WPP
by: Torsten Tiedt

Summary

The British stock market is not as ambitiously priced as the US stock market.

The British stock market has high quality dividend growth stocks.

Some of these dividend growth stocks are fairly or even under-valued.

I show you five of them.

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Five British dividend growth stocks

Contrary to Nasdaq and S&P 500, other stock markets did not reach new highs like a clockwork. The British stock market did not recover from the financial crises the same as well as the US stock market.

Performance of the S&P 500 from pre-financial crises to now: +80 percent.

Performance of S&P 500 Source: TradingView.com SPX

Performance of the FTSE-100 from pre-financial crises to now: +8 percent.

Performance FTSE 100 Source: TradingView.com UKX

In this article, I am trying to find British dividend growth stocks and look for their current valuation.

Definition of dividend growth stocks

I apply the following set of criteria to define dividend growth stocks:

  • Stable earnings growth in the last 20 years (correlation at least 0.8 out of 1.0).
  • Yearly earnings growth in the last 5 years of at least 5 percent on average.
  • Stable dividend growth in the past (correlation at least 0.9 out of 1.0).
  • Yearly dividend growth in the last 5 years of at least 5 percent on average.
  • No decreasing dividends for at least 10 years.
  • Positive outlook for the earnings of the next business year.

The popular payout ratio is not part of my criteria set, because the earnings coverage of dividends is already met by stable and growing earnings. But to satisfy reader’s curiosity, I also show the payout ratios based on earnings (how it is done most often) and free cash flow (how it should be done more often).

Furthermore, I am looking for global players not dependent on a single local market. Apart from diversification, successfully conquering new markets is a proof of competitiveness.

Five British dividend growth stocks

The following stocks met all criteria:

Source: Stock screener on dividendstocks.cash

Each of these stocks is a dividend contender with Bunzl (OTCPK:BZLFF) becoming a dividend aristocrat in the coming year. Historic earnings stability is above 0.8, dividend stability exceeds 0.9 and the earnings outlook is positive. All companies are global players and furthermore, the highest payout ratio based on free cash flow of twelve trailing months is 62 percent.

Dividend rhythm in Great Britain

Most companies in the US pay dividends four times a year. In Great Britain, it's more common to have only two dividend payments. In the dividend calendar below, you'll find the rhythm of each company regarding ex-date (the bell) and payment date (the dollar sign).

Source: Dividend calendar on dividendstocks.cash

Dividend growth stocks on sale?

Due to the weak performance of the FTSE-100, investors may hope to find at least some of these dividend growth stocks being “on sale.” The valuation of the stock price is based on historic averages calculated for earnings, operating cash flows and dividends. Additionally, an earnings growth-based model is used. If the historic deviation between fair value and actual stock performance is too large, the corresponding fair value may be removed as inappropriate for the valuation of the current stock.

Details about the fair value calculation methods can be found here.

Now let’s have a closer look at each stock.

WPP

WPP Source: WPP company website

What they do

WPP (NYSE:WPP) is the world’s largest advertising company. Its central hub in London acts like a spider controlling a web of thousands of smaller marketing agencies around the world. The parent company assumes the administrative work of its agencies (e.g. budgeting and controlling) and coordinates the pool of talents spread around the globe in favour of its customers.

WPP’s revenue for the last twelve trailing months was 15.256 billion GBP and its net income was 1.750 billion GBP.

Earnings and dividends history

For decades, this model worked very well, translating into growing earnings, cash flows and dividends. Yearly earnings growth of the last years is close to 14 percent, with dividends increasing by the same rate. Dividends are paid and rising for 21 years. Some investors may be worried about the high amount of goodwill: 13.082 billion GBP out of 33.765 billion total assets. But it is the business model of WPP for decades to acquire companies, integrate and exercise tight control by assuming their administrative parts.

Source: Stock screener dividendstocks.cash

Remark: Although there is a decline from “latest data” to the next estimate, the comparison from business year to business year is positive (1).

Current situation and valuation

According to CEO Martin Sorrell, 2017 was the worst year for the ad industry, as large clients like Unilever or Sky reduced its marketing budgets (source). Still, according to the third quarter presentation, WPP's revenue and net sales were positive thanks to favorable exchange rates and basically flat on a constant currency basis. But investors are also afraid of digital agencies like Accenture Interactive (NYSE:ACN) and tech giants like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) stealing marketing budget.

Accordingly, in 2017, WPP’s stock price tumbled from 19.21 to 12.53 GBP, a loss of 35 percent. Fair values based on estimate of the current year range from 15.60 up to 16.80 GBP compared to current stock price of 13.97 GBP right now (1). Anyway, analysts like Brian Wieser predict new growth in the ad industry at the end of 2018 or 2019. Last week, the stock gained more than 8 percent, but according to my fair values calculation, WPP is still undervalued.

Source: Stock screener dividendstocks.cash

Current dividend yield

The low stock price boosts the current dividend yield to 4.24 percent, close to all-time high.

Source: Stock screener dividendstocks.cash

Diageo

Diageo Source: Diageo company web site

What they do

Diageo (NYSE:DEO) is a global leader in beverage alcohol with manufacturing sites in about 30 countries and selling its products in more than 180 countries. Their biggest markets by net sales are North America (33 %) followed by Europe (25%) and Asia (20%).

Source: Interim investors overview 2018.

The company was founded in 1997, but the products they sell reach back much further.

Diageo’s revenue for the last twelve trailing months was 12.159 billion GBP and its net income was 3.261 billion GBP.

Earnings and dividends history

Diageo’s earnings, cash flows and dividends grew about 6 to 8 percent by year for the last 10 years.

Source: Stock screener dividendstocks.cash

Current situation and valuation

According to analysts and the latest interim result, the long-term positive momentum continues across all regions with organic growth of net sales of more than 4 percent. Diageo’s objective to deliver consistent mid single-digit top line growth seems plausible regarding its historic performance based on a business model merely affected by disruptive technologies.

Investors should not expect a bargain here, but the stock is not overly expensive, either. Fair values range from 21.80 to 22.75 GBP compared to a current stock price of 24.70 GBP. Thanks to growing earnings, fair values will probably catch the current price next business year resulting in long-term capital gains and further growing dividends.

Source: Stock screener dividendstocks.cash

Current dividend yield

Source: Stock screener dividendstocks.cash

The current dividend yield of 2.5 percent is at the historic low. But thanks to dividend growth, the estimated yield in 2020 shall rise to 3 percent.

Compass Group

Compass Group Source: Compass Group company website

What they do

Compass Group (OTCPK:CMPGF) is the world’s largest caterer. It serves meals for over 55,000 customers in more than 50 countries. 54 percent of its revenue is made in the US. Europe accounts for 25 percent with the rest scattered between Asia, Australia and Latin America.

Its revenue for the last twelve trailing months was 22.568 billion GBP and its net income was 1.161 billion GBP.

Earnings and dividends history

We see a steady increase of earnings, cash flows and dividends. Earnings increased by an average of more than 10 percent by year. Dividend growth is slightly lower with 9 percent by year within the last 5 years.

Source: Stock screener dividendstocks.cash

Current situation and valuation

The most important, most profitable and fastest growing region is North America, whereas in the other parts of the world, growth stagnated in recent years:

Source: Compass Group factsheet 2018

But latest figures show positive momentum outside North America, too. In the last three months, organic revenue in Europe grew 2.1 percent and 4 percent in the rest of the world. It may also be reassuring, that in North America growth remains stable across all sectors.

This stock is valued slightly more ambitious than the previous two. Relevant fair values range from 11.40 to 14.70 GBP compared to the current stock price of 15.50 GBP. Thanks to growing earnings, the fair values start catching up to the current stock price in 2019.

Source: Stock screener dividendstocks.cash

Current dividend yield

With 2.2 percent, the current dividend yield is on a historically low level. But dividend growth is expected to remain strong. In 2020, the dividend yield shall increase to 2.7 percent.

Source: Stock screener dividendstocks.cash

Bunzl

Bunzl Source: Bunzl company website

What they do

To make a company work, it needs all kinds of physical stuff not directly related to its business model, ranging from toilet paper to protective clothing. Instead of each company organizing these daily needs itself, it can outsource these procurements to Bunzl, resulting in overall lower costs for Bunzl’s customers.

Close to 60 percent of the company’s revenue comes from North America and about one third from Europe. Latin America and Australia share the rest. According to latest half year report, organic growth was 3.7 percent, accelerated by acquisitions to a total of 7.3 percent.

Source: Bunzl half year results 2017

Its revenue for the last twelve trailing months was 8.102 billion GBP and its net income was 286 million GBP.

Earnings and dividends history

Becoming a dividend aristocrat next year, both earnings and dividend growth of the last decades are very impressive, although Bunzl’s margins are the lowest of the five stocks presented, they remain stable since 2007, making the business highly predictable. The free cash flow covers both acquisitions and dividends with ease, making it very probable that yearly dividend increases of 5-6 percent continue.

Source: Stock screener dividendstocks.cash

Current situation and valuation

In recent months, the stock took a slight beating. Current price is 20.40 GBP, being exactly where the historic fair values based on earnings and operating cash flow reside for the estimate of the current business year.

Source: Stock screener dividendstocks.cash

Current dividend yield

Although the current stock price decreases, the current dividend yield of 2.1 percent is still well below the historic average. At least, the expected dividend yield is expected to climb to 2.5 percent until end of 2019.

Source: Stock screener dividendstocks.cash

Spirax-Sarco

Spirax Sarco Source: Spirax Sarco company website

What they do

Spirax Sarco (OTCPK:SPXSF) in an engineering group and supports its customers to save energy, lower emissions and achieve regulatory compliance. Most of its customers are from food and beverage as well as from the pharmaceutical industry. What they do is complicated and needs highly qualified staff and knowledge. Part of the company is Watson Marlow, focusing on peristaltic pumps and associated fluid path technologies.

The company operates all over the world. Its most important markets in revenue are Europe, Middle East and Africa (32%), followed by Asia (23%) and Americas (17%). Watson-Marlow accounts for 28% of total revenue according to the report of the last six months of 2017.

Source: Spirax Sarco half year results 2017

Earnings and dividends history

The company pays dividends since 2005 and increases them by 7.5 percent a year. Earnings and cash flows increase with similar pace and stability, making Spirax-Sarco an attractive long-term investment.

Its revenue for the last twelve trailing months was 842 million GBP and its net income was 131 million GBP, making Spirax-Sarco the smallest company presented here.

Source: Stock screener dividendstocks.cash

Current situation and valuation

The company manages to grow revenues and operating profit in all regions except Americas. Watson-Marlow is also on track with somewhat lower organic operating profit due to heavy investments.

Source: Spirax Sarco half year results 2017

In contrast to the previous companies, Spirax-Sarco’s stock price is close to historic all-time-high, resulting in fair values far below the current price. Fair values for the current estimated business year range from 34 to 37 GBP vs. the current price of 55 GBP. Based on estimates, it will be in 2020 or later until most fair values catch up with the current price.

Source: Stock screener dividendstocks.cash

Current dividend yield

According to the high stock price, the current dividend yield of 1.4 percent is close to its all-time-low. Based on the current price, the yield is expected to increase to 1.8 percent until end of 2019.

Source: Stock screener dividendstocks.cash

Conclusion

All five companies manage to increase its earnings and dividends year by year for at least a decade. Most of the stocks are fairly or even undervalued and highly successful in their respective markets. All of them generate part of their revenues in the US and for most of them, the US is the most important single market.

In times of ambitiously priced stocks, investors may turn their attention to the British stock market and find fair valued dividend growth stock there. The table below shows a summary of the fair values applied on each stock.

Source: Stock screener dividendstocks.cash

Disclosure: I am/we are long WPP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.