Can G4S's Rising Dividend Beat the FTSE?

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LONDON -- The last few years have been tough for investors relying on the FTSE 100 (INDEX: ^FTSE) to deliver a rising dividend payout.

Looking at the iShares FTSE 100 ETF, an exchange-traded fund that tracks the benchmark index, we can see that the aggregate payment from Britain's top 100 companies has yet to regain its prerecession peak:

Year

2007

2008

2009

2010

2011

Dividend per Share (pence)

19.1

20.2

17.1

16.2

18.1

Still, there are companies out there that, despite the banking crash and gloomy economy, have managed to deliver a rising dividend throughout the last five years. One such name is G4S (ISE: GFS.L) , whose market cap ranks it 70th in London's premier FTSE 100 index.


If you don't know, G4S describes itself as "the word's leading international security solutions group," and its business involves putting people where they are needed to handle security -- for people, buildings, cash, or anything else. With the shares at 286 pence, the market cap is more than 4 billion pounds. This table summarizes G4S's track record:

Year

2007

2008

2009

2010

2011

Sales (millions of pounds)

4,483

5,928

7,009

7,258

7,522

Operational Cash Flow (millions of pounds)

291

373

509

448

372

Adjusted Earnings per Share (pence)

13.3

16.6

20.2

21.9

22.8

Dividend per Share (pence)

4.96

6.43

7.18

7.9

8.53

The dividend has increased by 72% during the last five years -- equivalent to a 14.5% compound annual growth rate.

Since emerging in its current form in 2004, G4S has reported progress every year for many of its key financial indicators, including the dividend. Growth still seems on the agenda: According to the company, there is an increasing trend from government and commercial customers to outsource integrated security solutions.

What I really like about this expanding business is its global reach. The company has operations in more than 125 countries and a workforce of 657,000 employees. It currently derives 47% of its revenue from Europe, 23% from North America, and 30% from what it calls "developing markets," which include places like the Middle East, Latin America, Africa, and Asia-Pacific.

In today's world, it's hard to imagine demand for security services waning. Apart from the troubled spots of the world, there's always the need, somewhere, for more benign security management -- like the London Olympics contracts that are currently stuffing the G4S coffers.

G4S keeps expanding both organically and by acquisition. Indeed, G4S's sheer size will lift it up the security food chain and make it one of few bidders capable of servicing certain big contracts.

G4S's dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:

1. Dividend cover: Earnings cover the dividend more than twice. Score: 4/5

2. Net cash/debt: Net gearing is about 120%, with interest covered around four times. Score: 3/5

3. Cash flow: Cash flow supports operating profits. Score: 4/5

4. Outlook/recent trading: A reasonably secure outlook, say the directors. Score: 4/5

Overall, I score G4S 15 out of 20, which encourages me to believe the firm's dividend may continue to outpace dividends from the FTSE 100.

Foolish lock-in
Although interest cover is reasonably good, G4S has quite a bit of debt. As long as cash flow holds up going forward, that debt should be manageable. The company's bullish outlook is encouraging.

Right now, the forecast full-year dividend for G4S is 9.37 pence per share, which supports a possible income of about 3.3%. That's not tempting enough for me, so G4S will stay on my watchlist for now.

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Further investment opportunities:

At the time this article was published Kevin does not own any shares mentioned in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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