6 december 2010
Dividend increases on their way
Aviva returning to the dividend list
What to buy now?
Launching a new service in the New Year
State of the Market
Several companies we have covered have signalled that their dividends will increase next year, and in some cases the following year.
This is rather unusual, as normally companies don’t announce dividends for the following year(s!), unless they have solid business models that throw off cash so that they can confidently predict dividend increases going forward.
This is the type of companies we very much like as an Early Retirement Investor, and therefore we have written up on some of these, such as:
Mobile telecommunications giant Vodafone paid a dividend of 8.31 pence for the year ended 31 March 2010. At the same time, it announced a new dividend policy with its full year results:
"The Board is ... targeting dividend per share growth of at least 7 per cent per annum for the next three financial years ending on 31 March 2013. We expect that total dividends per share will therefore be no less than 10.18 pence for the 2013 financial year."
The company has since announced its first interim dividend under the new dividend policy: 2.85 pence per share, which is a 7.1 per cent increase on last year's.
The current dividend policy of National Grid was announced in January 2008 and will run until 31 March 2012. It's simply:
"A targeted increase of 8 per cent per annum."
National Grid is very much on track to achieve that, but only if shareholders have participated in the rights issue earlier this year. In its recent half-year results, National Grid announced an interim dividend of 12.9 pence, meeting its 8 per cent target increase on the previous year.
If the final dividend also meets the minimum growth target, the total dividend for the full year will amount to at least 36.4 pence.
There's also the prospect of 8 per cent dividend growth next year, but thereafter I expect National Grid to make a more formal announcement with regards to a new dividend policy going forward, rather than:
"Beyond 2012, we intend to pursue a policy that targets real growth in dividends reflecting the growth prospects of the business."
Scottish & Southern Energy
Scottish & Southern Energy is very much committed to delivering real dividend growth for its shareholders. The company set out its latest dividend policy alongside its full-year results in May, 2010:
"SSE has set a target to increase its full-year dividend per share by at least 2 per cent more than Retail Price Index (RPI) inflation in each of the three financial years to March 2013, with annual above-inflation increases also being targeted for the subsequent years."
The company has recently announced its first interim dividend under the new dividend policy:
". . . 6.7 per cent increase takes our interim dividend to 22.4 pence per share and means we are on course to deliver a full-year dividend of at least 74.5 pence per share."
Aviva returning to the dividend list
We have initiated initial coverage on Aviva Plc, UK’s listed composite insurer.
Aviva comes with a “warning sign” due to its rather erratic long term dividend track record.
Aviva, which had been increasing its dividend pay-out since 2003, cut its dividend in the recent downturn by almost 27.3 per cent to 24 pence a share.
However, with increased sales and margins boosted, thanks to cost cutting and non-core disposals, Aviva’s recent half year results reassured investors that the Group is back on track, with an inflation busting 6 per cent increase in the interim dividend to 9.5 pence.
Based on these half results, Aviva’s group chief executive Andrew Moss sees strong cash generation from the various parts of the group which will allow Aviva to return to:
“sustainable and growing dividends” going forward.
What to buy now?
I would like to thank one of our subscribers – Robert from St Albans – for his comments about what he has been buying recently and his question to me: what would I buy in the current situation?
This poses me with a bit of a problem as I have not set up Early Retirement Investor.com to provide any kind of personalised financial or investment advice. Therefore none of our company write-ups at Early Retirement Investor.com have any mentioning of whether we regard any of these companies a ‘Buy, Hold or Sell’ based on the then current share price.
It's important to remember, that our starting point at Early Retirement Investor.com is purely educational and informational. That the companies we write-up on are just examples of dividend paying companies for savers, investors and (future) retirees to consider and for them to perform further research on.
On that basis, whether we write-up this company and not another is beside the question. Rather, what we try to show are the general principles and benefits behind dividend investing when investing for the long(er) term.
Launch of a new service and web-site?
Robert’s question however has made me think. Would there be sufficient interest out there for some kind of a ‘low-cost’ subscription-based web-site where I would show why, when, at what price and in which income generating companies I invest.
The core idea behind such a new website, and accompanying email alert service, would be to allow subscribers to track or even copy any of my transactions (or dismiss them altogether) if they wish, and secure the same type of dividend returns as I’ll be getting.
What do think? What would such a service need to entail to be of interest to you? What would you be willing to pay for such a service?
Please do let me know whether you believe this would be of interest to you, or any other comments you would like to make on this initiative. It's much appreciated!
The state of the market
Another quarter has almost past and what a rally we have witnessed in September and October in just about everything.
However, market jitters returned in the course of November and early December due to concerns over sovereign debt default in Ireland, Portugal, Spain, Italy and Belgium. The list keeps growing.
How many Euro countries are there?
The current "rally", in my view, has, to a large extent, been driven by the anticipation of the Fed’s second round of Quantitative Easing (QE2). This was eventually announced in November to the tune of US$600 billion.
With no signs of any real economic recovery in the US, QE2 can only be described as an act of desperation by the Fed to prevent the US economy from sinking into deflation – something the Fed Chairman believes is to be avoided at all costs.
Economists are split about QE2’s effectiveness in warding off deflation but public sentiment everywhere is overwhelmingly against it.
In retrospect, I believe the USA has 'cleverly' created a series of bubbles to keep the economy under the illusion of growth and prosperity for over a decade. First it was the dot-com bubble and bust, then the housing bubble and now bust.
I wonder whether the next bubble could be that of emerging markets. Such as China . . . . as
Royal Bank of Scotland think.
China’s impending credit bubble
China’s economy has been overheating for several quarters now and things have by no means improved.
In fact, America’s announcement of QE2 has made things worse because it has resulted in a fall in the US dollar, to which the Chinese Yuan is pegged to.
China is an export driven economy and a falling currency against the Pound, Yen, Euro and other non-US dollar economies has made Chinese goods even more competitive, leading to increased demand, further fuelling domestic inflation.
However, in the meantime Chinese local food prices have risen by over 10% and talk of social discontent is on the rise. China’s domestic consumption is still insufficient to address the expected(?) reduction in exports to the slowing, sluggish western economies.
Clearly, the next phase of growth for China needs to be more balanced and sustainable, i.e. less export growth and more domestic consumption.
What about Europe?
“We’re going to get a continuation of the problems that Ireland, Portugal, Spain and others are suffering,” said Callum Henderson, Standard Chartered’s global head of foreign-exchange research.
“The fundamental issue is these are countries that have relatively large debts, large budget deficits, large current-account deficits, they don’t have their own currency and they can’t cut interest rates. The only way they can get out of this is to have significant recessions.”
Returning to the UK . . .
Recent economic data is showing better-than-expected economic growth in the second and third quarters and even a multi-year high in the manufacturing figures. Exports are up. Personally, I regard this a temporary blip.
UK’s new car sales are down for the fifth month in a row. Consumers’ pre-VAT increase spending appears to have gone through the roof recently despite that many of us were unable to get to the shops – instead internet sales are up by two- thirds!
However, I just can’t see this continuing for much longer with:
- the VAT increase on January 4th, 2011
- unemployment rising due to many government jobs being axed
- households increasing in debt
- house prices further eroding
- overall demand remaining sluggish
- government capital spending being cut
- inflation increases lurking
Commenting on the depressed new car sales, Howard Archer, chief UK economist at Global Insight, warned that consumers would come under further pressure in 2011 as VAT is increased to 20pc and public sector spending cuts take effect.
“These pressures are likely to make worried consumers' very careful about splashing out on big-ticket items such as a car,” he said. “The substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets, while households already face high unemployment, muted earnings growth, elevated debt levels and pretty high fuel prices.”
Perhaps a new car scrappage scheme is been planned for 2011?
Luckily, many FTSE100 companies generate large parts of their revenues and profits abroad, shielding them somewhat from the impending deteriorating situation in the UK, although part of their revenues come from Europe, China, the USA . . .
Finally, we would like to take this opportunity to thank you for all the feedback and encouragement and wish you and your family a Merry Christmas and a prosperous New Year. Have a good one wherever you are.
Thank you for reading.
Until next time.
Early Retirement Investor.com
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