I reckon the directors’ decisions about the dividend of any firm tell us lots about the state of current trading and managements’ opinion about the outlook.
Super-investor Lord John Lee puts a lot of emphasis on dividend decisions, for example, and his investments have worked out well over the decades.
But rather than looking at absolute levels, such as how high the dividend yield is, I prefer to focus on how much the dividend is growing each year. To me, a dividend-led investment has a greater chance of success for shareholders if the finances support a dividend that rises a bit each year, such as with these two, below.
Distribution and services
Bunzl (LSE: BNZL) supplies non-food and generally not-for-resale products to businesses, organisations, and sectors. This includes stuff that businesses and organisations use in their everyday operations such as chemicals, safety consumables, bandages, gloves, labels, films, grocery, packaging, and products for cleaning and hygiene.
It’s a steady number, and the firm has an impressive multi-year record of generally rising revenue, cash flow, earnings, and dividends. And City analysts following the firm expect modest, single-digit percentage improvements in the current trading year and the year after that. Indeed, the company has an unbroken record of dividend-raising stretching back at least 26 years, which strikes me as impressive.
In the third-quarter trading update delivered in October, the company said mixed macroeconomic and market conditions means the rate of growth in revenue has slowed. However, there is a decent acquisition pipeline and the firm has committed around £100m on purchases this year so far. I reckon the acquisitive and organic growth looks set to continue in the years ahead.
With the share price close to 2,113p, the forward-looking earnings multiple for 2020 is just over 16 and the anticipated dividend yield is around 2.5%
Energy transmission and distribution
National Grid (LSE: NG) owns the UK’s electricity and gas transmission systems. That’s the big pipes, cables, and pylons that shift energy long distances up, down, and across the country. The firm also has a gas and electricity business in the US. Both its UK and US operations are heavily regulated, and in the UK, they are a prime target for those who’d take the country back to the bad old days of nationalisation.
I used to work in a nationalised electricity utility organisation and have seen first-hand the massive inefficiencies and costs that can infect a business when it has zero competition and a monopoly with guaranteed income through electricity meters! Think shockingly bad, then multiply by ten – that’s what I saw.
However, if the threat of nationalisation is holding the share price back, now could be a good time to pick up a few National Grid shares because I think it unlikely that it will happen – at least not because of the outcome of the general election due in December. Meanwhile, National Grid has a progressive dividend policy.
With the share price near 910p, the forward-looking earnings multiple for the trading year to March 2021 is just under 15 and the anticipated dividend yield is around 5.5%. I think the valuation is attractive.