5 Dividend champions with high returns on capital

Consistent dividend growth is something that many dividend investors look for, and dividend champions are companies that have achieved it for 25 years or more.

However, it’s an extremely difficult feat to achieve and as a result, there are very few dividend champions in the FTSE All-Share.

To get around this problem, I’m going to temporarily redefine dividend champions as companies with a ten-year record of unbroken dividend growth. In the FTSE All-Share, there are about 40 such “mini” dividend champions, which I think is a good number to work with.

In addition, I’m going to limit that list to five companies with the highest levels of profitability, measured using the average ten-year return on capital employed (ROCE).

Why? Because combined with consistent dividend growth, I think consistently high profitability is an excellent way to search for high-quality companies with sustainable competitive advantages. And those are exactly the sort of companies that have a good chance of prospering long into the future.

So without further ado, here is that list of five highly profitable mini-dividend champions.

1: WH Smith – FTSE 250 – General retailer (cyclical)

  • Share price: 1778p
  • Dividend yield: 2.5%
  • Ten-year overall growth rate: 8.6%
  • Ten-year average ROCE: 47.4%
WH Smith plc results 2017 04
Share buybacks have helped fuel earnings and dividend growth despite a lack of revenue growth

I’m always amazed by how successful WH Smith has been in recent years. My gut reaction is that it seems like a dead-end business selling stationary, books and magazines, all of which can be bought online or in supermarkets.

Obviously, my gut reaction is wrong and is probably based on memories of me buying 12-inch singles in shoddy WH Smith stores as a teenager.

Although the company has been very successful, the picture is somewhat mixed; total revenues have gone nowhere in the last decade while earnings and dividends per share have more than doubled.

That unusual feature is largely explained by a combination of share buybacks – with the total number of shares almost halving in the period – and improving profitability, probably due to the company’s relentless focus on cost-cutting and efficiency.

And speaking of profitability, the figure of 47% ROCE is somewhat misleading because WH Smith is a retailer. Most retailers rent their shops, so although the shop is capital employed within the business, it doesn’t show up on the balance sheet. This makes the capital employed figure lower and therefore the return on capital employed figure higher.

However, even amongst retailers, WH Smith’s ROCE is very high and consistent and continues to improve.

2: Dunelm Group – FTSE 250 – General retailer (cyclical)

  • Share price: 625p
  • Dividend yield: 4.0%
  • Ten-year overall growth rate: 16.2%
  • Ten-year average ROCE: 38.3%
Dunelm plc results 2017 04
Results don’t get much more consistent than this

Dunelm is the UK’s leading retailer of curtains, duvets, cushions and such, and is a favourite with my wife. I have never set foot in one of the company’s stores, but it is a holding in the UKVI model portfolio and my personal portfolio as well.

Why? Because I like the fact that it’s a dominant market leader, it has a very good record of growth and profitability, and it has very little in the way of debt or pension liabilities.

Like WH Smith, Dunelm is a retainer with rented premises, so ROCE is skewed upwards somewhat. However, I’m aware of that and don’t have a problem with it.

I also like its market-beating dividend yield of around 4%. This, I think, is mostly down to other investors being worried about a slowdown in the homewares market and the UK retail market as a whole.

3: Domino’s Pizza UK – FTSE 250 – Travel & Leisure (cyclical)

  • Share price: 325p
  • Dividend yield: 2.5%
  • Ten-year overall growth rate: 15.7%
  • Ten-year average ROCE: 38.0%
Dominos pizza plc results 2017 04
A perfect ten-year record of increasing revenues, earnings and dividends

I have wanted to own a slice of Domino’s Pizza for a very long time, but its high price has always ruled it out (apologies for the terrible pun, but I could not resist).

However, with a share price that has been flat for almost two years, Domino’s Pizza UK is becoming ever more interesting.

In terms of the company, it’s the UK & Ireland master franchise of the famous US pizza brand and has been operating here for around 25 years.

Its track record is almost too good to be true; the company has grown with incredible pace and consistency for years.

In the last decade, it tripled in size whilst pulling off the almost impossible feat of growing revenues, earnings and dividends every single year (as has Dunelm).

4: PayPoint – FTSE 250 – Support Services (cyclical)

  • Share price: 1015p
  • Dividend yield: 4.2%
  • Ten-year overall growth rate: 7.7%
  • Ten-year average ROCE: 33.9%
PayPoint plc results 2017 04
Another company lacking revenue growth which could eventually become a problem

PayPoint offers a dizzying variety of payment-related solutions for local retailers based primarily around its electronic point-of-sale system (a very modern electronic till, effectively).

The till gives a store’s customers the ability to pay for shopping, pay electricity bills, transfer money, buy bus tickets, pay for parking, top up mobile phones and all manner of other day-to-day payment-related tasks.

The company has performed exceptionally well for many years, although this is another example where revenue growth is lacking. Growth from increasing productivity, profitability and margins is all well and good, but revenue growth is still an absolute prerequisite for long-term sustainable growth.

The share price has been flat for almost four years as investors have become gradually less enthusiastic about PayPoint, and today the yield on offer is now above the market average at 4%.

Another attractive feature is that PayPoint is virtually debt-free.

5: Rotork – FTSE 250 – Industrial Engineering (cyclical)

  • Share price: 251p
  • Dividend yield: 2.0%
  • Ten-year overall growth rate: 7.7%
  • Ten-year average ROCE: 27.8%
Rotork plc results 2017 04
Slowing dividend growth and falling earnings; can Rotork turn things around?

Rotork is the world’s leading designer and manufacturer of actuators and flow control hardware, for gasses and liquids.

It’s one of those hidden champion companies, with a strong brand in a niche market, manufacturing relatively low-cost items where quality, reliability and a trusted supplier are far more important than price alone.

Hidden champions are often predictable businesses with high profitability relative to other less-trusted competitors.

As you can see from the chart though, being a hidden champion and dividend champion is no guarantee of unending growth, and Rotork has suffered some setbacks in the last couple of years.

The reason is mostly down to low oil prices, which have caused a massive reduction in the amount of engineering work going on in the oil and gas industry; an industry which accounts for about half of Rotork’s revenues.

Despite this, the company has continued to grow its dividend, although only by 1% for the past couple of years. Obviously, Rotork’s management is keen not to lose its status as a dividend champion.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

11 thoughts on “5 Dividend champions with high returns on capital”

  1. John, A very interesting article for which I have a few comments, just for a change he grins.

    On WH Smith, yes it never ceases to amaze me either. I manage the mother in law’s share portfolio for my sins and as an ex-WH Smith employee she has some legacy shares which I left in the pot for her and it’s done her no harm whatsoever. I can’t personally get excited by it, but their travel business and small outlets (close to rail stations, airports etc) are a real boon despite what we all think about the dwindling high streets. It’s not for me, but it will do for her he mutters mischievously!!

    I look at what M&S is now doing and consider that there is a parallel being drawn that will do it some favours so I will hang on to M&S. As your last M&S article highlighted, it’s really all about the food and it’s positive expansion at the expense of cloths etc, which in themselves are looking better these days. Important moves like the deal with British airways look like an amazing long term business. A dividend champion? – well it has always paid one even if it has gone up and down like a ….. OK I’ll stop there.

    Dunelm, — no disrespect to your wife, but whenever I’ve been asked to go in with my wife, I’m always looking for the door.

    Domino — I just took the plunge at 308 and 320 — I think the story is still intact and the recent shock could well prove to be the entry point I’ve been looking for. We shall see of course — in the future.

    Paypoint — It’s not for me — they already had to dispose of the mobile business and I suspect innovative payment systems will wipe them out in time. In terms of payments, it’s PayPal for me which is 1.8% of my investment wad and growing at 20% a year.

    Rotork — great company but have never spent enough time analysing it – maybe I should — are you due a detailed article on it John? I tend to shy away from anything connected with the oil business though!!

    I doubled up again on IG Group – which perhaps is also a dividend champion for the long term if they don’t get regulation fever.


    1. Hi LR, keep them coming; your comments always brighten up my otherwise dull blog posts!

      M&S – It always had the potential to be a dividend champion, but multiple CEO’s seem to get carried away with too much dividend growth during retail booms, which then of course become dividend cuts as soon as the next downturn arrives. I think as a food business it may be more stable so there’s still some hope left for the old girl yet.

      Rotork – yes, perhaps I will do a more detailed write-up. It’s not far off the top of my stock screen at current prices, so it will be interesting to see if there are any skeletons in the closet, or if it’s as squeaky clean as it appears at first glance.

      IG – I’m still holding on, but tend not to double down as I’ve been burned on that before. Many years ago I kept doubling down on a company all the way to zero, although I was much younger and more risk-seeking back then. I’m too old for that much excitement/risk/stupidity these days!

  2. John

    As always a very interesting post.

    WH Smith – they have done a remarkable job to squeeze costs. I just cannot get enthused with any business which is in long-term decline. I liked it more when it sold records! Their mark-ups on some products are astonishing. I paid over £9.00 for a packet of cigarettes which normally would have cost about £7.50 some time ago. That was in Chichester not London! So not for me.

    M&S – I bought these shares a little while back – up just a little but I hold out hope for them in the long-run. There are not many bricks and mortar retailers I would be happy to own but M&S is an exception and I agree it is the food offering that attracts me to the business as that cannot be replicated well by online retailers.

    Dunelm – like you never been to one of their stores and no desire to either! The business has certainly done well in the past but must be vulnerable to any slowdown I would have thought. The shares remain quite pricey despite recent falls. Unlike Next which I think may be a better bet – we will see. I prefer M&S to both.

    Domino – I would definitely invest at the right price – I have been watching it appear higher in the Stock Screen table with interest!

    Paypoint – I did own these shares for a few months, read an article by Phil Oakley, did not like what I was reading, and got out again – just wiped my face. I did not understand the product and when Phil explained it I still did not really understand it except the product seemed very antiquated and vulnerable to technical progress. It did teach me not to buy shares in companies I do not understand so for that I am grateful!

    Rotork – I watched it appear at the higher end of your Stock screen and jumped in! This has been a great company for years although patience will be needed. The weak £ may attract foreign interest which would be a shame – I would rather it re-rated under its own steam.

    Thanks again for the post

    1. Hi Jonathan. On Rotork, it almost went into the model portfolio in January 2016 (I think) but was pipped at the post by Aggreko, another engineering company with dominant global leadership. Alas, Aggreko has not done as well as Rotork so far in terms of share price gains, but in just a year or so that’s mostly the random fluctuations of the stock market.

      Both are excellent companies I think, although of course that does not guarantee future success. Anyway, good luck with Rotork; perhaps one day I’ll join you as a shareholder!

  3. Apparently there are services that will calculate lease adjusted ROCE numbers, I am thinking of Sharepad for example.

    As for Dunelm I must say I am a bit mystified the share price has performed so poorly recently, I was considering stepping in around here to buy some. You should go in there sometime Jon. In addition to a good line in homeware my local Dunelm use the floor space to host a cafe which does a much better line in bacon rolls than Greggs, minus the screaming kids and annoying customer service announcements of the nearby Tesco.

    1. Hi Andrew, yes SharePad does lease-adjustments. I do subscribe to SharePad but don’t use that feature, yet. It’s another layer of complexity I’d rather do without, and I’m not sure it would add much value give all the other checks and balances I use.

      On Dunelm, I think it’s mostly out of favour because it’s a UK retailer, and they’re almost all sinking lower at the moment, for obvious Brexit-related reasons (weaker pound, potential economic slowdown, etc.). I have no intention of selling though and will probably hold the shares for a good few years yet.

  4. Good, write up John.

    I am familiar with most of the companies mentioned and would like to give my 2 cents.

    WH Smith; – a good business that relies on last minute travellers going to their shops for basic necessities and gifts. Basically, if passenger numbers fall they are in trouble.

    Dunelm; – a great business and there could be further growth as bricks and mortar retailers are closing down like BHS.

    Domino’s Pizza UK; – one of Britain great investor Nigel Wray sold his stake for £28m in 2013. He once held a 27% stake at one point. http://citywire.co.uk/money/wrays-alternative-topples-in-to-dominos/a227056

    Paypoint; – the thing with technology it changes very few years and Paypoint is becoming a victim. The smart debit card is reducing the need to top-up their oyster cards. Bills are paid by Direct Debit.

    Rotork; – not familiar with the business model.

    Out of the five, I think Dunelm is a worthy winner.

    1. Hi Walter. Here’s some two cents to your two cents:

      WH smith – Perhaps margins are higher in the last minute traveller business because people can’t be bothered to search for the best possible deal. They just want to smoke and read a magazine while waiting for their plane. And air travel is expected to grow over the next few decades, which should help.

      Dunelm – Just doubled its internet business by acquiring Worldstores.

      Paypoint – Yes, it seems weird that a business is focusing on the newsagent as a major payment and transaction hub for bills, travel tickets, money transfers and so on. Surely the internet and smart card/phone payments will kill this sort of business off? Or perhaps I’m out of touch with who does what in their local newsagent. Either way, Paypoint has been very very successful in recent years, although whether that will be the case ten years from now is another matter.

  5. I own Rotork, not the others and probably never will as they do not excite me in any way.

    I also own Domino’s Pizza Inc in the US, a diferrent proposition as it is the Master Franchiser. I had it for a bit more than 6 years and now it is a 10-bagger for me. Terry Smith owned it from the begining of his fund and I participated to a presentation immediately after the launch of his fund and bought it myself too.

    1. Hi Eugen, Domino’s US has certainly been a good stock. I think Terry sold his holding though because the valuation went too high for his liking.

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