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Is SABMiller plc A Super Income Stock?

A Tough Year

Shares in SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) have had a disappointing year. They have underperformed the FTSE 100 by a considerable amount, being down over 18% during the last 12 months, while the FTSE 100 is currently up 1% over the same time period. However, could shares now be good value after a disappointing run? More importantly, can SABMiller now be classed as a super income stock?

Strong Growth

With a dividend yield of 2.4%, SABMiller may not appear to be much of an income play. Indeed, the FTSE 100’s yield of 3.5% offers a considerably better income, although SABMiller’s yield is above inflation and remains significantly better than returns offered by a high street savings account.

sab.millerHowever, SABMiller has a strong track record of increasing dividends per share at an above-average pace. For instance, over the last four years SABMiller has increased dividends per share at an annualised rate of just under 15%. While the world economy has struggled, a dividend per share growth rate of 15% per annum is mightily impressive.

Furthermore, SABMiller is forecast to continue to increase dividends per share at an impressive rate in future, too. For example, dividends per share are expected to increase by 8.6% over the next year and by 9.2% in the following year. Therefore, while shares only yield 2.4% at the moment, this looks set to increase over the next two years (unless, of course, the share prices also rises).

Dividend Payout Ratio

While SABMiller’s dividend growth rate is strong, the company remains rather mean when it comes to the proportion of earnings that it pays out as a dividend. For example, in the past year it has paid out just 45% of earnings as a dividend which, for a mature company operating in a (very) mature industry, seems rather low. Certainly, SABMiller needs to invest in its business but this could still be achieved with a more generous dividend. This means that there is scope for further yield improvement in future.

Looking Ahead

Trading on a price to earnings (P/E) ratio of 17.4, SABMiller’s shares come at a premium to the FTSE 100, which has a P/E of 13.5. However, with the above-average profit and dividend forecasts, the scope to pay out a much higher percentage of profits as a dividend and the stability of a mature business in a mature industry, SABMiller seems to be an attractive income play at current price levels. After a disappointing 12 months, SABMiller could turn out to be a super income stock.

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Peter does not own shares in SABMiller.