Lately, Ive been running some tests to gauge business and financial quality to see if dividends seem built-to-last at some popular FTSE 100 companies.
Of the firms looked at, British American Tobacco (LSE: BATS), BT Group (LSE: BT.A), Unilever (LSE: ULVR) and ARM Holdings (LSE: ARM) scored the highest and heres why.
Dividend records
A decent dividend record is one factor to consider, although what happens in the future is what really counts. Of the four firms, ARM Holdings stands out with its sterling record on growing dividend payments by 138% over the last four years. BT Group pushed its dividend up by 67% over the same period, British American Tobacco up 23% and Unilever 13%.
For their dividend records, I scored ARM Holdings and BT Group 5/5, British American Tobacco 4/5 and Unilever 3/5.
Dividend cover
ARM Holdings expects forward earnings to cover its dividend around 3.4 times, BT just over twice, Unilever 1.5 times, and British American Tobacco around 1.35 times.
On those expectations, I scored ARM Holdings 5/5, BT Group 4/5, Unilever 3/5 and British American Tobacco 2/5 for their level of dividend cover from earnings.
Cash generation
Dividend cover from earnings doesnt help pay dividends if cash flow doesnt support profits.
ARM Holdings enjoys a well-defended niche designing microchips for the consumer electronics industry and its intellectual property licensing business model is highly cash-generative. BT Group also extracts oodles of consistent cash flow from its internet and fixed line data and communications network and services. I scored both firms 5/5 for their ability to keep the cash rolling in.
Unilever and British American Tobacco both run consumer goods business, with repeat-purchase attractions. For their record on cash generation, I scored them both 3/5.
Debt
Firms cantpay big dividends if most of their free cash flow goes to service big borrowings. Thats why big debts are undesirable in dividend-led investments.
BT Group uses a fair amount of other peoples money. The firms borrowings run at just under four times the level of operating profit. British American Tobaccos debts sit at around 2.75 times profits, Unilevers at about twice profits and ARM Holdings stands out as being debt-free with a handy pile of cash too.
For their circumstances around debt, I awarded ARM Holdings 5/5, Unilever 4/5, British American Tobacco 3/5 and BT Group 2/5.
Degree of cyclicality
British American Tobaccos market in addictive sin products makes it perhaps the most immune of the four from the negative effects of cyclicality. I scored the firm 5/5.
Unilever and ARM Holdings both received 4/5, and I judged that BT Group is most likely to suffer a downturn in business if the macroeconomic outlook weakens, so gave the firm 3/5.
The final scores
Here are the overall scores:
|
BAT |
BT |
Unilever |
ARM |
|
|
Dividend record |
4 |
5 |
3 |
5 |
|
Dividend cover |
2 |
4 |
3 |
5 |
|
Cash generation |
3 |
5 |
3 |
5 |
|
Debt |
3 |
2 |
4 |
5 |
|
Degree of cyclicality |
5 |
3 |
4 |
4 |
|
Total score out of 25 |
17 |
19 |
17 |
24 |
Based on these measures, I would argue that ARM Holdings has the strongest business, but the firms immediate dividend yield is low at around 1.1%. However, I cantignore the companys stunning rate of dividend growth.
None of these companies is perfect by these measures, but theyre the highest scorers of those I looked at.
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Kevin Godbold owns shares in ARM Holdings. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended ARM Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
