Merchants Trust (LSE: MRCH) is partial to dividend shares, a focus that has enabled it to increase its own dividend for 34 consecutive years. Three of the trust’s latest buys look particularly interesting.
Lloyds
Merchants bought back into Lloyds (LSE: LLOY) last summer, following the bank’s first dividend payment in six years. The trust said: “We see scope for a continued revaluation as confidence builds in the bank’s ability to grow, which should also support strong dividend growth”.
Merchants bought more Lloyds shares in March, and in its latest update this week highlighted big banks and oil & gas producers as areas of the market that “trade at depressed levels and offer good value”.
Trading on a current-year forecast price-to-earnings (P/E) ratio of less than 10, Lloyds does indeed appear to offer good value, having considerable scope to rerate higher. For example, the long-term historical forward P/E of the FTSE 100 is around 14, and if Lloyds were to be rated on such a P/E, its shares would trade at 106p.
And then there’s the dividend. Analyst consensus forecasts give a 6.1% yield for the current year, rising to 7.1% for 2017, which looks a very generous offer for investors today. I can see why Merchants is so keen on the stock.
Centrica
In this week’s update, the trust told its shareholders that during April: “Within the portfolio, the biggest change was to take profits on part of the holding in National Grid, after substantial share price appreciation, switching the proceeds into a bigger position in Centrica (LSE: CNA) which offers better long-term value”.
British Gas owner Centrica has been a disappointing investment in recent years, its share price having halved since 2013 and its dividend having been ‘rebased’ earlier this year.
Recent history may not inspire confidence, but Centrica is reducing its upstream exposure under new management and focusing on its consumer-facing businesses. With this strategic shift, and bolstered by a recent £700m fundraising, the company should perform more as we expect a utility to perform in future.
Despite the rebasing of the dividend, Centrica still offers an attractive prospective yield of 6%, and I can understand Merchants seeing long-term value in the ‘new’ company.
Hostelworld
Hostelworld (LSE: HSW) only floated on the stock market last autumn, and many dividend-focused private investors may not have seen such an unproven newcomer as an attractive proposition. However, Merchants isn’t alone in being keen on the company; equity income master Neil Woodford is also a big backer.
Hostelworld is the leading online booking platform for budget accommodation. Asset-light and highly cash-generative, the company is committed to paying out 70%-80% of profits in dividends.
The company announced a maiden dividend in its results last month, which represents an annualised yield of 5.3%. Merchants said: “We added to the initial investment, after the results, on growing confidence in the prospects for future growth”.
Hostelworld certainly appears worthy of consideration by private investors looking for dividend stars of the future.
