In search of growing Swiss dividends

In conclusion of my recent article In my analysis of SMI companies from the perspective of their dividend culture, I mentioned that the search for good candidates should not be limited to the Blue Chips in the index. Rather than scrutinizing companies in a certain index, why not define a certain number of criteria and focus on the companies that meet them?

Taking advantage of the screener proposed by the site ft.com, I thus embarked on the exploration of Swiss companies using criteria that seem to me, if not exhaustive, at least important to identify companies that could offer interesting investments for the dividend investor. I launched a search by consecutively including the following criteria:

1. Swiss companies listed and referenced by the Financial Times website (252 companies)
2. Minimum dividend of 2.5% for the financial year 2012 (reduces the results to 113 companies) => This is an arbitrary criterion setting a minimum profitability.
3. EPS growth >5% over the last five years (16 companies) => An increase in profits, represented here by the Earnings-per-share ratio, is a condition that allows the dividend to grow.
4. P/E ≤ 25 (14 companies) => The criterion of a maximum P/E of 25 makes it possible to avoid selecting companies whose shares are significantly overvalued.
5. Dividend paid for at least 5 years without interruption (12 companies) => This is a criterion indicating that a company adheres to a policy of paying out a share of profits in the form of dividends.

The result of the screener is thus made up of 12 companies from various sectors. In the table below, I have reported some information relating to each company in order to judge their dividend potential. Table 1 covers several important aspects of dividends, indicating for each company:

• the yield for the year 2012,
• the payout ratio (share of profit devoted to dividend payment),
• the average dividend growth over the last five years,
• the number of years of dividend payment,
• the number of dividend increases,
• the regularity of the dividend

If the amount of the gross dividend from one year to the next is stable (identical) or increasing, then it is a so-called "regular" dividend; on the contrary, if the amount of the dividend falls or the payment is interrupted for one or more years, then the dividend is said to be "irregular". This regularity is very important for the investor because he or she is obviously looking for companies offering a dividend whose amount is predictable. The data, all dated May 10, 2013, are taken from the site www.ft.com, pages investor relations companies and supplemented as necessary by information from the website http://www.finanzen.ch. It should also be noted that all the companies selected pay a dividend on an annual basis.

Table 1. Information on dividends of companies from the screening

Company	ticker	Yield	Payout ratio (ttm)	DGR 5 years	Number of years of payment	Number of Increase(s)	Regularity
Baselland-schaftliche Kantonalbank	BLKB	3.13	17.10	3.34	5has)	1	Yes
Bell	BELL	2.67	31.48	8.45	11	5	Yes
Engelberg mountain railwaysb)	TIBN	3.06	24.62	4.56	6	3	Yes
Bossard	BOS	3.82	39.99	13.90	5	1	No
Calida	CALN	3.21	32.31	26.19	10	3	No
Gurit	GUR	3.88	51.07	18.20	11	2	Yes
Implenia	IMPN	2.80	37.23	22.87	5	4	Yes
Inficon	IFCN	5.50	95.83	16.37	9	4	No
Lem	LEHN	4.21	N / A	40.91	16	6	No
Novartis	NOVN	3.33	62.46	3.68	16	15	Yes
Tamedia	TAMN	4.57	39.88	13.90	12	4	No
Warteck Invest	WARN	3.85	81.82	1.86	13	6	Yes

Note. Payout ratio (ttm) = Payout ratio over the last 12 months. DGR 5 years = Dividend Growth Rate, i.e. the average dividend growth rate over the last five years. a) This is a minimum number (data not found on the company's website). Regularity is then judged on this minimum number. b) The full name of the company is "Bergbahnen Engelberg Truebsee Titlis Bet". N/A = information not available

 

Reading Table 1, a major surprise appears: some leading SMI companies such as Rock, Swisscom, ABB, Syngenta or even Zurich do not come out in the results of the screenerThis is explained by the fact that the average growth in earnings per share (EPS) of these companies is negative for the period 2008-2012. Thus, companies from the screener have proven to be particularly strong in their ability to increase - not necessarily linearly - their EPS since 2008. Syngenta meets all criteria except yield (2.41%) which is slightly below the 2.5% threshold. The only SMI member from screening is so Novartis.

The yields are attractive, especially that of 5.5% offered by Inficon. This is not without risk, however. We note that two companies, namely Inficon And Warteck Invest[1] have payout ratios close to or above 80%, which suggests that they will have difficulty increasing the amount of dividends they pay in the future – at least more difficult than other companies with moderate ratios. Although all the companies presented have an EPS that has (on average) increased over the last five years, this is not a formal guarantee of a future increase in earnings, but an indication that the recent dynamics of the company are favorable.

Regarding dividend growth, we observe strong differences. Indeed, three companies (Basellandschaftliche Kantonalbank, Engelberg mountain railway And Warteck Invest) have DGR low or less than 5%; on the contrary, four companies have DGR higher than 20%. For the dividend investor, this second type of company is of course more desirable in the long term.

As for the regularity in the gross amount of dividends, four companies (Bossard, Calida, Inficon, Lem And Tamedia) are irregular. For example, the company Lem has paid a dividend sixteen times since 1994. However, no dividend was paid during the years 2002 to 2004 and an extraordinary dividend was paid on one occasion. Tamedia also offers an unpredictable dividend: it fluctuates downwards or upwards almost every year.

Table 2 indicates, for each of the twelve companies selected: their sector of activity, their capitalization, the variability of their price (Beta), an indicator of their value (P/E ttm ratio, i.e. the price/earnings ratio for the last twelve months), as well as the growth rate of earnings per share over the last five years (EPS growth). Unfortunately, I did not have access to a history of the P/E ratios which would have made it possible to judge whether the current value of the stock was interesting in comparison with its value over the last ten years.

Table 2. Company information

Company	Sector	Capitalization	Beta	P/E (ttm)	EPS growth 5 years
Basellandschaftliche Kantonalbank	Regional Banks	409 million	0.03	5.44	8.80
Bell	Food Processing	608 million	0.35	11.64	6.10
Engelberg mountain railways	Miscellaneous Transportation	77 million	0.31	8.86	20.09
Bossard	Miscellaneous Fabricated Products	334 million	1.22	11.10	7.47
Calida	Apparel/Accessories	135 million	0.75	10.06	28.82
Gurit	Chemicals - Plastics & Rubber	110 million	1.35	12.83	71.49
Implenia	Construction Services	638 million	0.65	13.51	22.53
Inficon	Scientific & Technical Instruments	445 million	1.26	17.42	10.78
Lem	Electronic Instruments & Controls	455 million	1.19	18.14	14.26
Novartis	Major Drugs	187 mia	0.75	18.97	6.79
Tamedia	Printing & Publishing	709 million	1.22	6.96	6.96
Warteck Invest	Real Estate Operations	179 million	0.22	21.12	9.88

Note. mio = millions of CHF, mia = billions of CHF. The beta index covers the last five years. The P/E is calculated over the last twelve months (P/E ttm).

 

We note that some of these companies have relatively small capitalizations, which makes them more vulnerable to economic crises than the Blue Chips of the SMI. Furthermore, the average P/E of the twelve companies is 13.61, which is significantly lower than the average P/E of the twenty companies of the SMI, which is 18.66. In other words, the companies resulting from the screening are much less "expensive" than those of the SMI. The information in the two tables allowed me to group the companies into three groups according to their interest for the investor in dividends. This is, of course, only my personal interpretation of this information.

The least interesting

In this category I classify Bossard, Calida, Inficon, Lem And Tamedia because of their irregular (unpredictable) payment history: this type of policy goes against what the investor is looking for in dividends. It seems that this irregularity is often due to the fact that the dividends paid by these companies are simply a predefined percentage (or range of percentages) of profits. Therefore, these are companies that I would not recommend despite the attractive value (P/E ratio) of some.

The interesting ones

I think that Basellandschaftliche Kantonalbank, Engelberg mountain railways, Gurit And Warteck are all interesting companies in terms of their dividends. However, there are negative aspects to consider.

Concerning Basellandschaftliche Kantonalbank And Engelberg mountain railways, it is the dividend growth that constitutes the weak point. The investor can however consider that the yield higher than 3% constitutes a good investment and be satisfied with a small increase if the DGR were to be confirmed in the future. Let us add that these two companies have low P/E ratios.

For Gurit, which offers a yield of 3.88% as well as strong dividend growth, there is uncertainty about the next dividend increase. Indeed, despite an eleven-year history of paying a dividend, this company has only increased it twice.

The last company in this category, Warteck Invest, has both strong advantages and serious disadvantages. While the yield is high (3.85%) and the dividend is regular, the dividend amount is stagnating. In addition, both the payout ratio and the P/E are currently high.

The most interesting

The screening results point to three interesting strong companies: Bell, Implenia And Novartis. Concerning Bell And Implenia, not only are these companies in a period of earnings growth, but they also have the advantage of paying dividends that are increasing sharply and regularly. In addition, they have a certain margin to continue increasing the amount of dividends over the next few years (payout ratios lower than 40%). These companies currently have values, as measured by the P/E ratio, that are quite reasonable. Implenia has a shorter dividend payment history than Bell, but compensates with a stronger EPS.

Novartis is a company that offers a great opportunity for the dividend investor: a sixteen-year dividend history with a systematic annual increase in the amount and a reasonable payout ratio. Its only flaw is that it is currently relatively expensive compared to most of the other companies screened.

To conclude, let us point out that, generally speaking, the dividend history of the selected companies is short in comparison with that of a company such as Procter & Gamble which has been paying a dividend since 1891(!) and has increased it every year for 57 years.

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