Last week, I wrote about the dividend ‘surge’ that could be around the corner following George Osborne’s overhaul of the way UK dividends are taxed. I concluded that, if history’s anything to go by, many companies will rush to announce special dividend payments during the next few months in an attempt to return as much cash to investors before the next tax rules come into force.
Direct Line Insurance (LSE: DLG), Admiral (LSE: ADM) and Esure (LSE: ESUR) are three special dividend candidates. All three are raking in cash, have strong balance sheets, and have a record of returning cash to investors.
Cash machines
Direct Line, Admiral and Esure are all highly cash-generative, which makes them the perfect candidates for special dividends.
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For example, Direct Line’s first-half results, issued today, really showcased the company’s cash generation. While the gross value of premiums written only ticked higher by 0.4% during the first half of the year, operating profit increased 43% to £336m. Moreover, return on tangible equity hit 21.2% for the period, up from the figure of 14.9% as reported in the year-ago period. Group net asset value rose by 16% during the first six months of the year.
But the key figure in Direct Line’s earnings release was the company’s risk-based capital coverage ratio, which stood at 155.9% at the end of June. Management is targeting a coverage ratio of 125% to 150%, anything above that level can be considered to be excess capital. Management has stated that it will consider returning excess capital to shareholders when it reports full-year results for 2015.
Similarly, Esure has built up an excess capital buffer that could be returned to investors. Under the Insurance Groups Directive, Esure is required to maintain a capital buffer of £81m to protect itself from sudden shocks and a higher-than-expected level of claims. At the end of 2014, Esure had £284m of Tier 1 capital. Including other capital resources, the company’s capital reserves exceed regulators required minimum by 377%.
Esure can’t return all of this capital to investors in one go, but the new dividend tax regime might inspire management to return a large chunk of it. City analysts currently expect Esure’s shares to support a regular dividend yield of 5.3% this year and 5.6% during 2016. These figures exclude special payouts.
Out of the three insurers, however, Admiral is most likely to issue a hefty special dividend towards the end of the year.
Admiral’s founder and ex-CEO is still the company’s majority owner and based on historic trends, companies with a high level of insider ownership always announce special dividends before tax changes come into force. What’s more, Admiral is already one of the FTSE 100’s dividend champions.
Over the past five years, Admiral has returned a total of £1.1bn to investors via both regular and one-off dividend payouts. This works out as around 90% of Admiral’s net income generated over the period.
City analysts have penciled in a dividend yield of 6.0% for Admiral this year and 6.3% during 2016. Once again, these forecasts exclude any special payouts.
