This FTSE 100 firm pays a bumper income to its owners, but how safe is this payout?
I've been screening the blue-chip FTSE 100 index for value, seeking shares that pay generous incomes to their owners.
My simple filter looked for companies with market values of at least £2 billion and dividend yields in excess of 4.5% a year. This search produced 22 high-yielding companies, including a few candidates from the mid-cap FTSE 250 index.
Among these 22 businesses paying bumper dividends were giants such as HSBC Holdings (LSE: HSBA), which has a market value exceeding £100 billion and yields 4.6%, and Vodafone Group (LSE: VOD), the £87 billion telecoms firm that yields 5.1%.
However, at the other end of the scale, were nine lesser-known (but still large) businesses in the sub-£5 billion category. One of these Footsie firms caught my eye: Resolution Limited (LSE: RES), which has a market value of nearly £3.7 billion, yet is a long way from being a household name.
Resolution listed on the London Stock Exchange in December 2008, issuing 660 million shares at £1 per share. The company was created as an investment vehicle to buy insurance companies and asset managers.
Based in Guernsey, Resolution aims to benefit from consolidation in the insurance sector. Led by insurance entrepreneur Clive Cowdery, Resolution's first major acquisition was to buy life insurer Friends Provident for nearly £1.9 billion in August 2009. It then bought AXA Sun Life Holdings in the autumn of 2010.
On Tuesday, Resolution released its preliminary results for 2011, which it described as "good progress towards building a sustainable business".
The main story for Resolution investors is its bumper dividend. In 2011, the FTSE 100 firm returned £476 million of cash to shareholders, via a 19.89p dividend per share and share buybacks.
As I write, Resolution shares are down 3% at 266p, giving it a historic dividend yield of almost 7.5%. This is more than twice the 3.6% yield offered by the wider FTSE 100 index. However, there is one big question: can this market-beating yield be sustained over the longer term?
In 2010, Resolution's basic earnings per share (EPS) were 81.1p, which covered its dividend more than four times over. Alas, in 2011, Resolution made a loss of 4.35p per share, thus its payout was completely uncovered.
Then again, Mike Biggs, Resolution's chairman, stated today, "The Company is committed to returning surplus cash not required by the business to shareholders subject to market conditions..."
One optimistic sign for income seekers is that Resolution raised its dividend by 10% last year. What's more, it has a capital surplus of £2.1 billion, which is 219% of its regulatory minimum. Also, the firm's balance sheet is sound, with "low exposure to higher risk European sovereign and corporate debt."
Looking ahead to this year, brokers forecast EPS of 26.5p and a dividend of 20.9p, putting Resolution on a forward price-earnings ratio just short of 10 and a prospective yield of 7.8%. For 2013, both these fundamentals improve, to 8.9 and 8% respectively.
Thus, although Resolution's dividend was not covered last year and may be covered only 1.3 times in 2012 and 1.4 times in 2013, it seems likely that this payout is fairly safe for at least the next two years.
Finally, shareholders in Resolution should keep their eyes peeled for further announcements regarding the company's plans to split into two separately listed businesses, which it hopes to achieve by early 2014.
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