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Alliance & Leicester [2005-09-02]

Alliance & Leicester (AL:LSE) 2005-09-02 Alliance & Leicester is a former building society, now a bank, with excellent dividend growth over the last few years.Interestingly, most of the big bank groups have acquired building societies so that after the spate of demutualisations some years back there are only three quoted former societies left: Alliance & Leicester, Bradford & Bingley and Northern Rock. Speculation is frequently to be heard that any or all of these will become bid targets in time but that has no influence on our choice of A&L at present, if it happens then that will be an extra bonus.Alliance & Leicester gives us the prospects of good yield and good growth. The reasons for choosing A&L are as follows: First, it has a yield of just under 6% based on the consensus forecast dividend of 52.7p for the year to 31 /12/05. That compares well with the average FTSE100 yield of about 3.2%. Second, it has the third highest yield in the FTSE100, after Lloyds TSB and United Utilities. Third, it has a good history of dividend growth approximating 9-10% per year over the last few years. That is well above inflation. The combination of a good initial yield and good growth is compelling. Rarely are these two features found side by side. Often the investor may have to accept a trade off of one against the other. The housing market is clearly on a down cycle right now, with fewer properties being bought & sold, which means fewer mortgages. In fact to reflect this, the analysts’ consensus dividend forecast for the year to 31/12/06 for what it’s worth is for 56.2p. Now that is only a 6.6% rise over the 2005 forecast, a much lower increase than the sort of annual increment seen in previous years. This reduction in forecast dividend growth stems from the flat earning per share projections which, after a big increase in actuals from 66.8p in 2003 to 86.0p in 2004, are expected to remain hardly changed for 2005 and 2006. We believe there has been excessive pessimism from the market, regarding Alliance & Leicester’s prospects. So we can take advantage of that & pick up the shares cheaply. It is possible earnings per share may well be affected by the slower demand for mortgages and that, dividend growth may similarly be affected. But, we think the combination of a high yield and a depressed share price, at the moment, makes a compelling argument for Alliance & Leicester. Alliance & Leicester is cheap compared to its peers. Enjoy the dividend whilst we await the share price rise. We suspect we won’t have to wait too long! Buy Alliance & Leicester ( AL :LSE) up to 850p.
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