Can Capita's (LSE: CPI) dividend continue to beat the wider market?
In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.
Just look at the iShares FTSE 100 ETF (LSE: ISF), for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:
|Dividend per share||19.1p||20.2p||17.1p||16.2p||18.1p|
But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Capita (LSE: CPI).
The big question is can the company's dividend continue to out-perform its index. Let's take a closer look.
Capita is one of the UK's leading outsourcing specialists. With the shares at 766p, the market cap is £5,008 million. This table summarises the firm's recent financial record:
|Net cash from operations (£m)||256||295||307||340||232|
|Earnings per share||28.1p||33.26p||38.75p||44.98p||48.49p|
|Dividend per share||12p||14.4p||16.8p||20p||21.4p|
So, the dividend has increased by 78% during the last five years -- equivalent to a 15.6% compound annual growth rate.
In an update released on 13 November, Capita sounded upbeat citing a record £1.7 billion in contract wins to that point during 2012. Apparently, that's the tip of a £4 billion bid-pipeline-iceberg itself backed up by a buoyant prospect list. If that business all converts to cash flow, the prospects for the dividend look encouraging, especially when compared to Capita's record on earnings and dividend growth.
Capita's business is providing operations execution skills to organisations. So, clients outsource 'non core' functions to Capita, like administration, ICT, HR and payroll, strategic development, and business process engineering. Capita then either takes the work directly, or comes into the organisation to introduce new, and better, systems and processes, and to train the client's staff to use them. Active mainly in the UK, last year the firm derived 20% of revenue from local government, 15% from health, 13% from education, 10% from central government, 8% from insurance, 7% from life and pensions, 4% from financial services, 3% from transport and 20% from other businesses in the private sector.
Well over half of revenues are from the public sector. Public sector organisations have always lacked the discipline that commercial success or failure provides to drive operational-execution efficiency, so I think forward demand for 'fixers' such as Capita is likely to remain firm.
Capita's dividend growth score
I analyse four different features of a company to judge whether its dividend can continue to rise:
1. Dividend cover: earnings more than twice covered the last dividend. 4/5
2. Net cash or debt: net gearing around 145% with borrowings about 3.8 times earnings. 2/5
3. Cash flow: cash flow slipped behind profits with the last full-year results. 2/5
4. Outlook and recent trading: good recent trading and a positive outlook. 5/5
Overall, I score Capita 13 out of 20, which encourages me to believe the firm's dividend can continue to out-pace dividends from the FTSE 100.
There's a fair chunk of debt on the balance sheet and cash flow fell a little behind last year, but recent trading, a positive outlook and decent dividend cover are all encouraging.
Right now, the forecast full-year dividend is 25.24p per share, which supports a possible income of around 3.3%. That seems like a full price to me, so I'll keep the shares on watch for the time being
Capita is one of several dividend out-performers on the London stock exchange. There's one man who's as keen as I am to find, and invest, in them. I suggest you read all about his best investment ideas now in this free, time-limited report, while you have the chance: 8 Income Plays Held By Britain's Super Investor. This free report analyses the £20 billion portfolio of legendary high-yield expert Neil Woodford. Click here to discover his favourite dividend opportunities with good growth potential.
> Kevin does not own any shares mentioned in this article.