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Finding Dividend Winners In A 40% Crash

Uh oh – it’s December, and there’s just a few weeks to go before a veritable herd of market gurus end up with egg on their face.
Yes, who can forget back in January how all the pundits rushed to predict the FTSE 100 crossing 7,000 before the end of the year?
City bulls included…

  • Jonathan Sudaria at Capital Spreads – predicting 7,400
  • Brenda Kelly at IG Index – forecasting 7,200
  • Tim Drayson at Legal & General – estimating 7,200
  • Paul Kavanagh at Killick Capital – projecting 7,400
  • Guy Foster at Brewin Dolphin – guessing 7,400
  • Maynard Paton at Motley Fool – foretelling 7,182

I must admit, I’m disappointed my FTSE 7,000 party hats and champagne glasses have spent yet another twelve months on my desk gathering dust.
Looking back, I really should have known we were not in for the best of years… not least because I excitedly revealed in January that “even a doom-monger over at Moneyweek has seen the light and claimed this year will see the index ‘get above 7,000’!”
Nonetheless, miracles can happen in the market – especially around Christmas. The FTSE 100 kicked off 2014 at 6,749 and today opened at 6,742 – so all we need is a little 4% ‘Santa rally’ to get to the magic 7,000.
Glimmers of hope come from a recent article in the Telegraph, which claimed the blue-chip index has produced a positive return in 19 of the last 20 years in December.
The average return from those 20 Decembers is 2%, with the highest gain more than 9%. I have my fingers crossed.

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I don’t remember anybody predicting this 40% crash in January!

Not helping matters of course is the oil price, which has crashed about 40% — from $115 to $70 — in the last six months. 
I bet you won’t find a single City expert having forecast that in their January predictions!
Which, no doubt, explains why so many oil shares have cratered of late.
Here are some of the big-name casualties of the year:

  • Afren — down 70%
  • Cairn Energy — down 39%
  • EnQuest — down 67%
  • Ophir Energy — down 57%
  • Premier Oil — down 37%
  • Soco International — down 29%
  • Tullow Oil — down 51%

I daren’t even look at all those oil tiddlers quoted on AIM — I bet it’s a bloodbath. The poor sods holding those shares will be praying for the miracle of all miracles this Christmas…

The oil price plunged and I sold in a panic

I must admit, I’ve suffered my own personal share of the oil-price pain of late.
I’ve never known much about the sector, although that ignorance never stopped me from investing in Soco International the other year. I liked the firm’s veteran management, solid cash position, actual production income and generous cash flow.
Sure enough, the cash flow turned into some very generous dividends and by this summer I was sitting on a healthy capital gain as well…
Trouble was, the oil slump then came and it took me a while to realise that oil stocks really weren’t for me.
Indeed, I realised only by mid-October that selling oil at $86 was likely to produce somewhat less in cash flow and dividends for Soco than selling oil at $110 or more.
My panic selling at 330p when the price had been 440p two months beforehand felt pretty lousy at the time…
…but feels a bit better now with the share price below 300p and oil price at $70. For the time being at least, I am glad I am out.

2 special and super-impressive dividend records for the long run

Still, the oil-price rout should in time throw up bargains somewhere. I’m not prepared to gamble on the actual explorers and producers anymore, but I might one day be tempted by a quality firm that supplies equipment to the industry.
For instance Rotork (LSE: ROR), a mid-cap engineer that makes heavy-duty controls for pipelines, boasts a super-impressive dividend record…  


…which has been bolstered nicely by six special dividends in the last ten years. That dependable payout record clearly indicates a tip-top operator and, from what I recall, the last time Rotork’s annual profits fell was way back in 2000 after the oil sector had to cope with prices as low as $10 per barrel.
Or there’s Goodwin (LSE: GDWN), a small-cap that manufactures specialist valves for refineries, which also boasts an impressive dividend record blessed with special payouts… 

Sure, Goodwin’s payout was cut in 2000 after oil had hit $10, but the overall trend since then indicates another first-class operator.

This could also involve another one- or two-year wait

Whether this pair are obvious bargains now is difficult to say. Both shares have dived about 25% from their highs and, for me at least, are definitely going on my watch-list as possible future buys.
For its part, Goodwin reckons the financial impact of the oil plunge is more likely to be felt in its results for 2015 or 2016.
That suggests perhaps waiting a year or two for some profit warnings could be the best way to snap up such a quality dividend winner at a rock-bottom price.
In the meantime, we always have FTSE 7,000 to look forward to.
Although the way things are going, sadly that may involve waiting until 2015 or 2016 as well.

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Maynard does not own any share mentioned in this article. The Motley Fool has recommended shares in Afren and Tullow Oil.