Interactive Investor

Three UK shares with a great dividend story

17th May 2022 13:36

Graeme Evans from interactive investor

Investors look to the UK for superior income opportunities and they will not have been disappointed today. Our City expert finds an 8% yield, a 28th year of dividend growth and a return to the dividend list for this AIM company.

Stock market winners with income appeal today included 8% yielding Imperial Brands and growth stalwart DCC (LSE:DCC), while small-cap Shoe Zone (LSE:SHOE) returned to the dividend ranks.

Imperial Brands (LSE:IMB) led the FTSE 100 index as half-year results not only reassured the City but beat earnings expectations, as it also declared a 1% or £4 million rise in dividend to 42.54p a share.

With high yielding stocks generating additional interest from investors at a time of soaring inflation, Imperial shares jumped 112.5p to their highest level since February 2020 at 1,825p and have now risen about 23% from their low of 1,486p seen in March.

The Bristol-based company, whose brands include JPS, Davidoff and Gauloises, gave a boost to confidence when chief executive Stefan Bromhard said today’s results showed further evidence of stabilisation in the company’s core combustibles business.

He said: “During the first half of the year, we increased aggregate market share in the five priority markets which account for around 70% of our operating profit, while maintaining pricing discipline.”

Bromhard, who is 18 months into a five-year plan to build a more sustainable business, also reported a 49% cut in operating losses from next generation products in vaping and heated tobacco.

Overall profits of £1.2 billion were down £436 million, reflecting Imperial’s exit from Russia and the previous year’s gains from the disposal of its premium cigar division.

On 6.5 times 2023 earnings, UBS notes that Imperial trades at a 47% discount to the wider tobacco sector and 66% versus staples. It blamed the discount on concerns about long-term prospects as well as a history of profit disappointment.

Imperial, whose strong cash generation enabled it to reduce its debt to earnings ratio to 2.4 times, intends to pay the second instalment of today’s interim dividend on 30 September.

DCC, the blue-chip conglomerate whose operations span healthcare to heating oils, also extended its record of dividend growth to a 28th year today by hiking its full-year award by 11.2% to 119.93p a share for payment on 21 July. Over three decades as a listed company, DCC has an unbroken record of growth at a compound annual rate of 13.7%.

Its shares rose 86p to 6,354p with analysts at UBS content to stick with their previous target price of 7,900p after today’s results highlighted another strong performance despite supply chain issues and energy price volatility.

UBS said today’s better-than-expected underlying earnings growth of 15% benefited from a particularly strong performance in healthcare due to continued PPE sales and strength in retail and oil after a return in volumes to pre-pandemic levels.

DCC currently trades on 14 times 2023 earnings but UBS thinks this “significantly undervalues” an expected 7% compound profits growth rate up to 2025, even before including the £2 billion of firepower available for potential acquisitions.

An AIM stock to watch

High street retailer Shoe Zone, which pulled its  2019 dividend award in order to conserve cash at the start of the pandemic and has not paid one since, is planning to hand shareholders 2.5p a share on 17 August.

It is able to do so because £4.4 million of outstanding Covid loans from the government have now been repaid and its balance sheet is once again debt free.

The award is all the more remarkable because Shoe Zone told shareholders in March 2021 not to expect dividend payments before 2025. At that point, Covid had left the business saddled with £12 million of debt having been debt free for over 15 years.

Chief executive Anthony Smith said today: “The rapid recovery of our business is due mainly to the continued support of our loyal and committed staff.”

The AIM-listed company, which reported half-year profits of £3.1 million compared with a £2.6 million loss the previous year, trades from 388 stores and has a growing digital operation.

Its shares initially jumped 7% today before retreating to stand 2p lower at 147.5p, which is still better than the 110p seen at the end of last year.

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