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Why I’d buy this top dividend stock instead of Centrica plc today

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Utilities companies have always been a favourite with income investors as their visibility of earnings and strong cash flow means they can typically pay out big dividends. And with City analysts expecting a yield of 9.3% from Centrica (LSE: CNA) for the year just ended, on the surface, it looks like a very attractive proposition.

But we’ve seen earnings per share from the energy supplier falling for several years, from 26.6p in 2013 to just 16.8p by 2016. The dividend has been falling back too, though not at the same rate. From 17p per share in 2013, the annual payout had been cut to 12p three years later, and forecasts would see that dropping to 10.9p by 2019.

The 2013 dividend was covered 1.56 times by earnings, but predicted cover for 2017 will have dropped to just 1.04 times.

Switching is easy

Consumers are switching suppliers rapidly these days, and Centrica lost 823,000 customers between June and November 2017. With belts still being tightened, I can see that run continuing for some time yet.

There’s regulatory pressure too, and Centrica’s set of proposals “to deliver a fairer and sustainable energy deal for customers” set out in November look like a ‘catch-up’ response to competitive and regulatory pressure. Changing its offerings in line with rivals may well slow the flow of departing customers, but regularly changing suppliers is the new reality.

It is still expecting operating cash flow to be above £2bn for 2017, with net debt between £2.5bn and £3bn, but forecasts suggest a bottom-line EPS drop of 26%. And although there’s a 9% earnings rebound pencilled in for 2018, I can see that falling cover putting the dividend under pressure.

Rising divdends

While Centrica’s dividends are falling, those from Fidessa Group (LSE: FDSA) are steadily growing. The software company, whose trading systems are used by the financial industry, revealed a 6% rise in its regular dividend for the year ended December 2017, to 45p per share.

On top of that, there’s a repeat of 2016’s 50p-per-share special dividend, to bring the total to 95p, for a total yield of 3.6% on Friday’s closing price of 2,605p. As I write on Monday, the share price is up 7% to 2,785p.

With the new MiFID II financial market regulations finally coming into force, chief executive Chris Aspinwall said: “It is also clear that increasing numbers of firms are going to need assistance in building out the platforms of the future and Fidessa is already seeing evidence of this within its pipeline.

He went on to suggest that the business is in a strong position to benefit by “replacing in-house platforms, other weaker vendors and also through specific small consolidation opportunities.

Growth plus cash

Adjusted pre-tax profit rose by 10% to £54.3m, with adjusted EPS up 11% to 103.9p, and cash stood at £92.4m at year-end. This all makes Fidessa’s cash prospects look good, and Mr Aspinwall also suggest it should mean “a greater ability to invest in further opportunities as the markets develop, or if the right opportunities are not clear, deliver an increase in margin.

Forecasts put the shares on forward P/E multiples of around 26, which might seem a bit high. But I see long-term growth potential here with the ability to expand both organically and by acquisition, and a prospect for steadily rising long-term dividends. Fidessa could be one to buy and hold for decades.

Great long-term stocks

I think shares like Fidessa, which offer a combination of long-term growth coupled with with rising dividends, can help you reach a very comfortable retirement.

And I'd personally combine them with more of similar quality, to lay the foundations of a great long-term portfolio. 

If you want to know what the Fool's top experts think, click here now for your free copy of their report on their five favourite super stocks.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Fidessa. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.