I was surprised when Barclays (LSE: BARC) told us it’s going to slash its 2016 dividend by more than 50% after announcing a fall in full-year profits — so you might be surprised to see me touting the bank as a top dividend prospect.
Pessimism priced in
The thing is, in these tough times when the final extent of banking penalties for past misbehaviour is still an unknown, I’m really not so much interested in this year’s dividend as in future ones — and I’m encouraged by Barclays’ longer-term expectations to “pay out a significant proportion of earnings in dividends to shareholders over time“.
The 3p per share that Barclays intends to pay this year and next would be covered 5.6 times by forecast 2016 earnings and 7.6 times on 2017 predictions, which is massively over-covered in comparison to long-term requirements — even if Barclays aimed for longer-term cover of two times, which would be above the likely sector average, we’d be looking at yields getting up towards 8% or so.
That’s largely because the share price has taken a pummelling, losing 40% over the past 12 months to 145p. That puts Barclays on a forward P/E of only nine for this year, dropping as low as six on 2017 forecasts — and to me that means the current share valuation has far more pessimism built in than is warranted. And I see Barclays shares now as one of the best dividend bargains for 2020 and beyond.
The housebuilding and construction sector has been the big success of the past few years, with Galliford Try (LSE: GFRD) a shining light. We’ve seen year on year of double-digit rises in EPS with two more forecast, and that’s helped boost the share price by 235% in five years — though a 24% fall back since September last year has left us with a forward P/E of under 11, dropping to nine on 2017 expectations.
That alone sounds like bargain territory, but the big attraction is Galliford Try’s dividends. They’ve been galloping ahead, and it was only the soaring share price that kept last year’s yield down to 3.9%. The year saw a 28% rise in the annual payment, with the board stressing its “progressive and sustainable dividend policy” and telling us it now aims to maintain dividend cover at 1.5 times rather than its previous more cautious 1.7 times.
That bodes well for the yield of 5.6% forecast for this year, and the 7% on the cards for 2017, which would be covered sightly more than 1.5 times by forecast earnings.
Who’s Netcall (LSE: NET), you may well ask. Netcall produces telephone and data services for call centres and customer engagement, and it’s used by healthcare and public-sector organizations as well as the private sector. After a few years of very strong earning growth, we saw EPS fall back by 4% last year and there’s a further drop forecast for this year. That’s taken the shine of the share price a little, and despite a five-year rise of 184% to 49p, there’s been a 7% drop in the past 12 months.
But what I really like about Netcall is that it is generating oodles of cash. At the interim stage in December, net cash had risen to £15.2m, boosted by £1.82m in operating cashflow in the period. Oh, and there’s no debt.
With more cash than it needs to invest in its latest cloud computing developments, the firm is embarking on “an enhanced three-year dividend programme“, leading to a forecast dividend yield of 6.1% this year followed by 7.8% next.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.