Interactive Investor

AIM's five great dividend growers

20th May 2016 15:41

Andrew Hore from interactive investor

AIM has a number of attractive dividend paying companies and recent research suggests that the junior market as a whole has better dividend growth prospects than the rest of the London market. Admittedly, AIM still lags behind when it comes to dividend yield, but many of the companies offer a combination of growing income and rising share prices.

According to research by analyst Peter Ashworth, published by broker Stockdale Securities, AIM's dividend growth lagged in 2013, but it was better than for most of the main indices for the Main Market in 2014 and 2015 and it is set to do much better than all of them in 2016. The forecast is based on the level of dividends that have already been declared in the first quarter of this year.

AIM outperforms

AIM dividends grew by 7.9% in 2013, 33% in 2014 and 9.7% in 2015. Special dividends can skew the figures from year to year, but this does show strong growth in dividends over a three-year period. Even the 2013 figure is impressive.

The analysis indicates that dividend growth has been outstripping earnings per share (EPS) growth, but the dividends are still well covered. Smaller companies also offer better growth prospects than their larger counterparts, suggesting that their dividends could continue to grow faster. That depends on the economy and other outside influences, as well as the businesses themselves.

AIM's 2015 dividend yield was 1.6%, whereas the FTSE Small-Cap yield was nearly double that level at 3.1% and the FTSE 100 yield was 4.1%. Remember, AIM, and in particular the larger AIM companies that are more likely to pay a dividend, have outperformed the FTSE 100 index, which has declined in the past year.

The FTSE 100 dividend growth rate of 4% on a dividend yield of 4.1% is not too bad considering the low interest income on cash, but it falls significantly below the 12.8% growth expected for AIM this year or even the 11% increase for the smaller companies on the Main Market.

Not all sectors created equal

There is a breakdown by sector in the research, but not every index has significant exposure to every sector. For example, there are not many telecoms and utilities companies on AIM and there are a limited number of dividend payers in the resources sectors compared with the larger mining companies.

What the figures do show is that AIM companies in the consumer, industrial and financials sectors offer particularly attractive dividend growth. The levels of growth have tended to vary substantially from year to year, although the industrials sector has been the most consistent.

Interestingly, the figures suggest that the technology sector provides less scope for dividend growth on AIM. That is probably because there are a number of early stage technology companies which do not pay dividends yet. There are plenty of technology companies that are growing their dividends at impressive growth rates - see First Derivatives below.

Of course, these are figures for broad sectors and investors can choose specific companies that have records of consistently growing their dividends. Here are five AIM companies that have been growing their dividends over a number of years, or at least since they floated. They have strong balance sheets, attractive cash generation and good growth prospects.

NAHL

254.75p - Forecast yield: 7.5%

The share price of personal injury claims provider NAHL has slumped since last autumn because of uncertainty about changes to eligibility for compensation for low-value whiplash injuries in car accidents. Whatever is decided, the changes will not happen until 2017 and NAHL is diversifying into conveyancing and critical care, which will offset at least some of the negative effects.

In 2015, revenue grew from £43.8 million to £50.7 million, with £5.6 million of the increase coming from acquisitions. Pre-tax profit improved from £11.8 million to £14 million - conveyancing contributed £823,000 and critical care £644,000. The total dividend for the year rose from 15.7p a share to 18.75p a share.

The stated intention is to pay two-thirds of retained earnings in dividends. Arden has trimmed its 2016 profit forecast to £16.7 million for a dividend of 19.2p a share. Profit and dividend growth is still anticipated for 2017.

AdEPT Telecom

265p - Forecast yield: 2.5%

Telecoms services provider AdEPT Telecom did not initially pay dividends after its flotation a decade ago, preferring to use its cash to help finance acquisitions. This changed in the year to March 2012 when a maiden dividend of 0.5p a share was paid, trebling to 1.5p a share the following year.

The dividend has grown rapidly since then. Last year's total was 4.75p a share and this year 6.5p a share has been promised. The forecast dividend will be covered nearly three times by earnings.

AdEPT has moved into higher margin managed services operations and this will help the business continue to grow. The latest acquisition is Comms Group, which provides unified telecoms, Avaya IP telephony plus hosted and managed services.

This deal cost an initial £3.5 million and will be immediately earnings-enhancing, so this augurs well for further dividend growth.

MartinCo

162.5p - Forecast yield: 4.1%

MartinCo is growing on the back of the expanding private letting market. Even though there has been an increase in supply of private rental accommodation in the past year, there is still an overall shortage because of the higher number of people in the country and the larger number of single-person households.

Private rental has overtaken public housing in importance, while home ownership is flat. This means that private rents continue to increase. MartinCo is the fourth-largest residential lettings agency in the UK and has 287 franchised offices around the UK.

MartinCo floated in 2013 and it has always offered an attractive yield. The maiden total dividend after its flotation was 4p a share and this was increased to 5.9p a share last year. A dividend of 6.6p a share is forecast for 2016 and this should be covered nearly two times by earnings.

First Derivatives

1,918p - Forecast yield: 1%

Software and consultancy services provider First Derivatives beat profit expectations in the year to February 2016. The focus has historically been on the financial sector, but other markets are being targeted and this should supplement growth.

Last year, underlying pre-tax profit jumped from £10.8 million to £16.8 million, helped by acquisitions and higher software sales. This enabled the dividend to be increased from 13.5p to 17p a share.

First Derivatives has been a consistent dividend payer and in recent years the growth rate has accelerated. Investec forecasts dividend growth of 10% a year for the next two years at least - a dividend of 18.7p a share this year. Dividends will be covered more than three times by earnings.

Given the record of the company, this estimate could be beaten. The yield is low, but growth should be good and the share price has risen by more than 50% in the past 12 months and more than trebled over three years.

Lok'nStore

332.5p - Forecast yield: 2.8%

Self-storage sites operator Lok'nStore was quoted for a number of years before it started paying a dividend and the early payouts were modest. The maiden dividend for 2006-07 was 0.66p a share, but this had risen to 8p a share last year. This year's dividend is forecast to be 9.2p a share and future dividends are expected to grow by 15% a year.

Self-storage is a growing sector and the business is cash generative, so Lok'nStore can pay the dividends as well as investing in new sites and maintaining headroom on its borrowing facilities. Management says that like-for-like self-storage revenues were 5.4% ahead in the first half. Higher prices and improving occupancy rates are behind this growth.

Newer sites at Reading, Maidenhead and Aldershot are performing strongly. New sites in Gillingham and Wellingborough have been secured. The document storage business, which had been disappointing, is improving its performance.

Net asset value (NAV) is 307p a share and is expected to rise to 320p a share by the end of July 2016.The premium to NAV is much lower than Main Market rivals such as former AIM company Big Yellow, where the premium is more than 50%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.