3 dividend champions in the making

A dividend champion is a company with a long history of increasing its payout by more than inflation year after year. Such aristocrats are few and far between. But they’re well worth seeking out — as are companies with good prospects of becoming dividend champions of the future.

A pipeline of dividends

FTSE 100 pharma giant GlaxoSmithKline (LSE: GSK) announced last week that chief executive Andrew Witty is to hand the reins over to current head of the group’s consumer healthcare division Emma Walmsley.

As the table below shows, under Witty’s tenure of getting on for nine years, Glaxo appears more like a faded dividend star than a dividend champion in the making.

  2009 2010 2011 2012 2013 2014 2015 2016* 2017*
Dividend 61p 65p 70p 74p 78p 80p 80p 80p 80p
Growth 7.0% 6.6% 7.7% 5.7% 5.4% 2.6% 0.0% 0.0% 0.0%

* Company guidance

Glaxo’s plan to hold the payout at 80p in each of the three years from 2015 to 2017 wasn’t the dividend crime of the century — we’ve seen far worse from quite a few other companies in recent times — but it did bring to an end a history of annual increases, from before Witty’s appointment in mid-2008.

Declining profits, largely as a result of a spate of patent expiries, were behind the decision. The toll from this has been such that even at 80p, last year’s dividend wasn’t covered by core earnings of 75.7p.

Witty has been criticised in some quarters for not acting quickly and radically enough to the patent expiry threat, but we are where we are. The strategy Witty pursued is now set to pay dividends — literally and metaphorically. Last year’s earnings represent a low, because a rise of 27% is forecast this year, covering the dividend 1.2 times.

With a strong drugs pipeline, and favourable demographics, Glaxo is expected to return to long-term earnings growth. Dividend increases should begin to accelerate once cover has been rebuilt. As the current yield while waiting is a juicy 4.8% at a share price of 1,660p, I reckon the shares are well worth buying for the long term.

A sunny dividend outlook

Fellow Footsie firm RSA Insurance (LSE: RSA) has had a decidedly chequered history — including several dividend cuts — since it was formed by the merger of Sun Alliance and Royal Insurance 20 years ago.

However, after root-and-branch surgery by chief executive Stephen Hester, who was appointed in 2014 following the discovery of serious accounting irregularities at the group’s Irish arm, RSA is now looking like a strong and focused business with the makings of a dividend champion.

Earnings are rising strongly, and with them dividends. After a 10.5p payout last year, the dividend is forecast to rise 36% to 14.3p this year, followed by 47% to 21p next year, as the company moves to its medium-term policy of a payout ratio of 40%-50%.

At a share price of 550p, we have a dividend yield of 2.6%, rising to 3.8% next year. Furthermore, the company says: “Potential for additional payouts should follow the completion of restructuring and progress in the unwind of unrealised bond gains.”

With bright dividend prospects, and the shares trading at 13 times next year’s forecast earnings, I also rate RSA a buy.

Another dividend champion in the making

My third pick as a dividend champion in the making is a company whose progress has gone unnoticed by many investors, but not by the sharp-eyed analysts at the Motley Fool.

Last year's payout from the company was hiked by 10%, covered 3.1 times by earnings, and projections by our experts indicate the dividend can march securely higher in coming years. You can read the full analysis of this company in a FREE, without obligation report called A Top Income Share From The Motley Fool.

To get your copy of this exclusive free report, simply CLICK HERE.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.