I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.
Right now, I reckon BT Group (LSE: BT-A) (NYSE: BT.US) is looking a great buy for income.
High growth attraction
Income investors often gravitate towards shares offering a high yield. But high yields can mean lower dividend growth, and sometimes portend a cut. I think there’s always room in an income portfolio for a few companies with a more average yield, but prospects of strong income growth.
BT Group has a chequered past as far as dividends are concerned. However, the company has made great progress in recent years, both as a business and a dividend payer, as the table below shows.
| 2009/10 | 2010/11 | 2011/12 | 2012/13 | 2013/14 | |
|---|---|---|---|---|---|
| Normalised free cash flow (£m) | 2,032 | 2,076 | 2,307 | 2,300 | 2,450 |
| Declared dividends (£m) | 534 | 574 | 654 | 749 | 879 |
| Declared dividends per share | 6.9p | 7.4p | 8.3p | 9.5p | 10.9p |
| Growth | 6.2% | 7.2% | 12.2% | 14.5% | 14.7% |
When announcing its 2011/12 results, BT had said: “As a result of our confidence in our ability to grow free cash flow, we intend to increase the dividend per share by 10%-15% per year for the next three years”.
In its latest (2013/14) results, BT’s Board extended the horizon for strong dividend growth, saying “we now expect to increase our dividend by 10%-15% for each of the next two years”.
City analysts reckon BT will actually deliver increases above 15%, but if we’re more conservative than them and work on the basis of 15%, we get dividends of 12.5p for 2014/15 and 14.4p for 2015/16.
A great opportunity right now
The market applauded BT’s last annual results and the Board’s extension of the high-growth dividend guidance. The shares subsequently traded well north of their current level of 362p, reaching above 400p at their height. After a fall of 9% over the last four weeks the shares are now changing hands at a price not seen since before the company extended its dividend policy.
The result is that the current-year yield (assuming a 12.5p payout) has risen to a market-average 3.5%. So, we now have a situation where BT is offering an average yield, but with an expectation of well-above-average dividend growth. Furthermore, free cash flow cover of the dividend is very healthy indeed. Hence, I rate BT a great buy for long-term income investors right now.