There is a lot of cutting going on at the moment. The oil industry is cutting capex. FTSE 100 miners are cutting production. The big supermarkets are cutting their expansion plans. And a number FTSE 100 companies have been cutting their dividends, led by Antofagasta, Centrica, Glencore, WM Morrison, J Sainsbury, Standard Chartered and Tesco. So you will be pleased to hear that not everybody is cutting back. Here are three FTSE 100 companies with plans to grow their dividends!
Buy British
British American Tobacco (LSE: BATS) is famed for its dividend reliability despite the shrinking appeal of tobacco products among health-conscious middle-class consumers in the West. Right now, it yields just over 4%, and its perceived defensive nature has spared it the worst of this year’s stock market shocks. Over five years it is up 65%, against just 5% on the FTSE 100. Dividend success can translate into growth glory as well.
The tobacco giant’s recent trading statement showed revenue growth of 4.2% over nine months at constant exchange rates, driven by the success of its Global Drive Brands, which have helped BATS build market share amid overall decline. I still have long-term doubts about an industry that has relied on emerging markets for around 70% of sales, as I expect Western health trends to eventually wash ashore in Asia. At 17.85 times earnings, British American Tobacco now costs more than 20% of above its long-term average but income seekers will remain addicted given that management has hiked the dividend every year since 1999, with share buybacks on top.Â
National Success
National Grid (LSE: NG) has been my favourite utility play for some time and I felt vindicated by its strong first-half earnings, with profit before tax up 21% to £1.37bn and earnings per share (EPS) up 22% to 28.4p. Right now it yields a juicy 4.73% but there is even more good news, with chief executive Steve Holliday confirming rumours that it has considered selling a majority stake in its gas distribution business and returning the proceeds to shareholders, probably in a special dividend.
Any sale should go through in early 2017, after which the board will continue to fund its investment programme and maintain the policy of increasing dividend per share by at least RPI for the foreseeable future. Still worth buying at 15.77 times earnings.
Royal Romp
It feels a long time since Royal Mail (LSE: RMG) peaked at around 600p shortly after launch. Today you can buy it for 440p. The stock may have overshot on the downside as well as the upside, because now it trades at 10.3 times earnings and delivers a healthy yield of 4.76%, covered twice. Chief executive Moya Greene knows the scale of the challenge ahead, as Royal Mail fights for share in the competitive parcels business, where competitors now include Amazon and Argos, while wringing revenues out of the declining letters sector.
Management is committed to increasing the dividend, that should be doable given its heavy cash generation and ability to raise cash from selling off its portfolio of London property. EPS are forecast to fall 22% in the year to March due to restructuring costs, then rebound a solid 4% in the year to March 2017. Royal Mail has a battle on its hands but today’s valuation and nicely-covered yield give it strong defensive abilities.