FirstGroup Stays Committed to 10% Dividend Yield

LONDON -- FirstGroup (ISE: FGP.L) hit the headlines recently over the bidding war with Virgin Trains over the West Coast franchise. However, of more interest to investors right now is its commitment to increasing its dividend by 7% this year. At the current share price of 245 pence, this means its dividend yield will be just more than 10%.

The transport group updated investors this morning ahead of its half-year results, which are due out in just more than a month. As already flagged, profits at FirstGroup are expected to dip this year, mainly due to lower subsidies and higher fuel costs at its U.K. Bus division. But FirstGroup did say it has seen some signs of improvement in this division in recent months, with like-for-like revenue growth of 2.5%.

UK Rail has seen much better revenue growth of 8.1%. FirstGroup is still expecting to take over the running of the West Coast franchise in early December, but Virgin Trains is currently contesting the Department for Transport's franchise award. In addition, FirstGroup has been shortlisted for the three other franchises currently out for tender.

Over in the U.S., its school bus business is expected to show lower sales but higher profit margins, while gentle sales are forecast for both its First Transit and Greyhound business units. The latter is continuing to expand its Greyhound Express service with new routes in Texas and California.

Commenting on the update, FirstGroup chief executive Tim O'Toole said:

I am pleased to report overall trading for the first half of the year is in line with our expectations. With a fundamentally strong and diverse portfolio of operations we are focused on driving a greater performance and delivering improved growth and returns. ... Reflecting its longer-term view, the Board remains committed to its current policy of dividend growth of 7% through to the end of the financial year 2012/13.

Last year's dividend was 23.67 pence per share, so 7% growth implies the current year's payout could hit 25.3 pence. However, although the dividend looks relatively secure for this year, the question is where it goes next. FirstGroup had 1.8 billion pounds of debt in March 2012 and is expected to be broadly cash-neutral this year.

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