Renowned fund manager Neil Woodford has been thrashing the market for a quarter of a century. Woodford is a very selective stockpicker. Fewer than 1 in 10 of the UK’s top 350 companies earn a place in his funds. So I always keep an eye on his holdings for promising investment ideas.
BT Group (LSE: BT-A) (NYSE: BT.US), Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) and NEXT (LSE: NXT) are three Woodford picks that have all delivered average annual dividend growth in double digits over the past three years — with more forecast to come.
BT Group
It seemed to take BT an eternity to throw off the legacy of a lumbering state-controlled organisation following its privatisation in the Thatcher years.
However, there’s perhaps no better endorsement for BT’s credentials today as a full-on entrepreneurial capitalist business, intent on delivering value for shareholders, than the high-conviction stake Woodford has taken in the company. At number four in his top 10 holdings, BT represents 6% of the fund.
BT has delivered average annual dividend growth of 14% over the last three years — and is targeting further increases of 10%-15% for each of the next two years. Analysts are forecasting growth will be at the top end of the range, giving a prospective income of 3.2% this year, rising to 3.7% next year at a recent share price of 388p.
Legal & General
Life insurer and fund manager Legal & General has recovered strongly since the 2008/9 financial crisis, and Woodford has recently become convinced enough to buy into the story. Strikingly, L&G is the only FTSE 100 insurer Woodford holds.
The company has delivered average annual dividend growth of 25% over the last three years. And with management having signalled its intention to move cash dividend cover from 1.8 towards 1.5 times over the next two years, further strong growth is on the cards.
Analysts have pencilled in a 17% hike in the dividend this year, giving a tasty yield of 4.6% at a recent share price of 237p.
Next
Woodford has long been a fan of retailer NEXT, but never quite got the opportunity he was looking for to buy. However, he revisited the story and valuation when launching his new fund and decided to bite the bullet. NEXT has, he says, “exactly the right shareholder value culture” that he looks for.
The company has delivered average annual dividend growth of 18% over the last three years, including, most recently, a 23% rise to 129p. The Board has a policy of buying back shares using strict valuation criteria, and, if the shares are above that level, of returning surplus cash to shareholders through special dividends.
The shares have been above the board’s value level this year, and shareholders have seen three special dividends, each of 50p. While the ordinary dividend represents a yield of just 2% at a recent share price of 6,615p, we’re talking about a fast-growing payout with an income super-charger of special dividends on top.