SMI and growing dividends (by Jean-Louis – guest member)

A significant number of S&P 500 stocks are known for their dividend culture—providing regular, growing dividends in a reliable manner. The best of these stocks are described and ranked in the portfolios of this site. As a resident of Switzerland, I have wondered about the potential of companies in my country for dividend investors: are there any Swiss companies that could be promising investments for investors following the dividend growth method? This article therefore attempts to present the relevant information that will allow one to form an opinion on SMI securities as dividend securities.

The SMI groups together twenty companies with very high capitalization, representing more than 90% of the total market capitalization of the Zurich stock exchange; in other words, these are the Blue Chips Swiss. In the tables below, I have reported some information about each company that allows us to judge their dividend potential. Table 1 covers several important aspects of dividends, indicating for each SMI company:

• the gross dividend paid for the year 2012,
• the yield,
• the average growth of dividends over the last five years,
• the number of years of dividend payment,
• the number of years during which the dividend has been increased and
• the payout ratio (over the last 12 months).

The data, all dated 1^er May 2013, are taken from the site www.ft.com and supplemented as necessary by information from the site www.dividendsranking.com.

Table 1. Information on dividends of SMI companies

Name	Gross dividend 2012 (CHF)	Yield (%)	Payout ratio (ttm)	DGR 5 years	Number of years of payment	Number of years of growth
ABB	0.68	3.23	63.67	11.74	8	6
ACTELION	1.00	1.74	31.71	N / A	3	1
ADECCO	1.80	3.57	72.94	14.87	16	irregular
CS GROUP	0.10	0.38has)	6.97	-47.47	17	irregular
GEBERIT	6.60	2.92	N / A	-13.83	14	11
GIVAUDAN	36.00	2.99	79.75	14.33	9 (min.)b)	7
HOLCIM	1.15	1.60	60.45	-17.55	26	14
JULIUS BAER	0.60	1.68	43.73	20.00	5	irregular
RICHEMONT	0.36	0.63	19.81	-10.50	12	irregular
NESTLE	2.05	3.08	62.21	10.94	53	41
NOVARTIS	2.30	3.33	62.46	3.68	16	15
ROCK	7.35	3.14	66.46	9.83	16	15
SWISSCOM	22.00	5.06	64.96	1.92	15	12
SGS	30.00c)	1.33	79.61	-4.36	9	irregular
SWATCH	6.75	1.27	23.48	9.69	10 (min.)	6
SWISS RE	3.50	6.37	67.04	2.79	20	irregular
SYNGENTA	9.50	2.41	43.22	37.72	12	9
TRANSOCEAN	0.00	N / A	N / A	N / A	1	0
UBS	0.15	0.95	?	N / A	11	irregular
ZURICH	17.00	6.58	70.36	4.41	13	7

Note: DGR = Dividend growth rate, i.e. the average dividend growth rate over the last five years. a) In addition to the dividend, a certain number of shares are distributed to shareholders. b) data not available on the company's website (taken from www.dividendsranking.com). c) In addition to the dividend, a bonus of CHF 28 is paid. N/A = information not available

 

All companies pay a dividend on their turnover for the 2012 financial year, with the exception of Transocean. This company only paid a dividend in 2012 and will not pay one in 2013, so it is a candidate to eliminate. Seven companies pay dividends in a highly irregular manner, with the amount varying greatly from one year to the next. This unpredictability must be taken into account by the dividend investor. Actelion, a company that went public in 2000, is only just beginning to pay a dividend, so its policy in this area remains to be defined.

Conversely, eleven companies could claim the title of reliable dividend payer. Among these companies, the one that seems at first glance the most impressive is Nestle which has been distributing a portion of its profits for 53 years, including 41 increases in the dividend amount. In contrast, ABB has been paying a dividend for “only” 8 years and has increased it six times.

THE yields The most attractive (> 5%) yields are offered by Swisscom, Swiss Re And Zurich. THE payout ratios are reasonable, with only four companies having a ratio higher than 70%. Regarding the average dividend growth over the last five years, we observe that some companies such as Syngenta, Julius Baer, Adecco And Givaudan are in a dynamic of dividend growth. Four companies offer a dividend that has practically not grown (Zurich, Novartis, Swisscom And Swiss Re) while the dividend offered by others has actually decreased (CS group, Geberit, Holcim, Richemont And SGS).

In conclusion, the information on dividends of SMI stocks indicates that more than half of the stocks could prove interesting in terms of the dividends they pay. On the contrary, Actelion, CS group, Holcim, Richemont, SGS, Transocean And UBS are in my opinion uninteresting in terms of dividends.

Now that some companies have been identified as interesting for the dividend investor, it is still necessary to determine whether they constitute buying opportunities. Table 2 indicates, for each of the thirteen companies selected, their value (P/E ttm ratio, i.e. the price/earnings ratio for the last 12 months), their historical value (average P/E ratio over the last ten years) and the variability of their price (Beta).

Table 2. Company information

Name	Sector	Capitalization (Billions)	Beta	P/E	Average P/E 10 years
ABB LTD	Electronic Instr. & Controls	49	1.45	19.25	22.53
ADECCO	Business Services	6	1.38	20.32	15.70
GEBERIT	Manufactured Plastic & Rubber	9	1.00	22.11	N / A
GIVAUDAN	Chemical Manufacturing	9	0.81	26.67	19.58
JULIUS BAER	Regional Banks	8	1.55	25.23	N / A
NESTLE	Beverages (Nonalcoholic)	214	0.61	20.00	16.77
NOVARTIS	Major Drugs	187	0.75	18.97	15.99
ROCK	Major Drugs	163	0.85	20.84	18.66
SWISSCOM	Communications Services	10	0.24	12.92	11.73
SWATCH	Jewelry & Silverware	16	1.30	17.96	19.27
SWISS RE	Insurance	25	2.28	6.94	N / A
SYNGENTA	Chemical Manufacturing	37	0.46	20.85	19.05
ZURICH	Insurance	38	1.38	10.52	9.18

Note: N/A = information not available

 

According to the P/E ratios and the comparison with their average over the last ten years, the shares of ABB, Rock, Swatch, Swisscom, Syngenta And Zurich are at affordable prices. In other words, their current P/E ratio is lower than or close to their historical P/E. On the contrary, Adecco, Givaudan, Nestle And Novartis appear to be overvalued companies if we are to believe their current P/E which is higher than the historical P/E.

For the investor looking for low volatility (Beta), securities of Rock, Swisscom, Syngenta And Zurich seem to be the best current options among the SMI. Note that Swiss Re offers a high dividend, although this is increased irregularly and weakly. The stock is also the most volatile in the SMI.

In conclusion, the SMI stocks offer some opportunities, but each stock has some weaknesses that are important to consider. It should be noted that other Swiss companies, not included in the SMI, would also deserve to be analyzed

Jean-Louis