Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Dave Taylor, fund manager, Chelverton Asset Management.
For bottom-up stock-pickers, the company results season is a time to get down to the coal face and do some work. This season has been a heartening one. Company directors are still relatively cautious, but the firms that we invest in are growing profits, albeit gently, and generating cash.
Dividend payments are also beating expectations we are looking forward to another year of real (post-inflation) increases, with consensus estimates putting the number somewhere between 6% and 7%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, although the short-term outlook for dividend growth is encouraging and provides a degree of support for equity valuations even after recent share-price rises, we would like to see firms start to release funds for reinvestment and to get capital expenditure moving.
Corporate balance sheets are at their strongest for many years. If this cash were reinvested in the business, it would provide investors with dividend growth in five years' time. Here are three stocks in cash-generative businesses that offer attractive yields and, we believe, offer scope for above-average dividend growth.
The first is UTV Media (LSE: UTV), which is the ITV franchise holder for Northern Ireland, and the largest radio player in Ireland. It owns 13 local radio stations across England and Wales as well as TalkSport, a national radio station. The current trading environment remains subdued, but the group is very cash-generative and highly operationally geared to a pick-up in radio and TV advertising rates.
When the upturn in advertising will happen is uncertain, but the recent 17% increase in the dividend means that investors can afford to wait for it while picking up a yield comfortably above 4%. That's a testament to the quality of the underlying assets in this company.
Another firm that has just posted an impressive increase in dividends is Abbey Protection (LSE: ABB), where the payout was lifted by 11% for the year ended December 2012. The current yield is also in excess of 4%. Abbey is a specialist insurance and consulting group, focused on the delivery of legal and tax-related professional insurance products and services to UK small- to medium-sized enterprises.
The company has a strong renewal base and has proved adept at developing new products the freeing up of the legal-services market is set to provide some exciting opportunities. Future dividend growth is underpinned by a strong balance sheet, which also provides the firepower to make appropriate acquisitions, should they arise.
Our final pick is St Ives (LSE: SIV), a print-display and marketing-services business. Over the past few years, the management has transformed the group by moving out of the commoditised sectors of the print industry, and investing in marketing services, which now account for around a third of the business.
This has been done partly through acquisition, with the purchase last year of Incite, a leading market-research consultancy, and this year of Amaze, a digital-marketing agency and consultancy. The group is well placed to benefit from an economic upturn and recently announced a 14% increase in the interim dividend. The underlying yield on the shares is around 4%.
