It's not what it seems at Melrose - no, it's much better!

I bought into Melrose in mid November (at a price of 206p per share) following a tumble in the share price on the release of their interim management statement. I didn't actually think that the statement was that bad and it appeared that the market had over reacted as it has a tendency to.

I'd already done the research into Melrose and they appeared to have a great dividend history, increasing dividends year on year demonstrating that they have a great dividend policy. To the naked eye though this isn't how it appears. Up until this year Melrose have shown dividend growth year on year and the dividend policy has been rock solid. This year however there has been a reduction in the dividend.

This is down to a rights issue whereby more shares were issued. The actual dividend was the same as people received more shares during the rights issue just that the dividend was reduced per share.

So without the adjustment for the rights issue the dividend history and dividend growth would appear as below;

            Dividend    Dividend Growth
2006         6                  
2007       6.75              12.50%
2008         7                  3.70%
2009        7.7               10.00%
2010        11                 42.86%
2011        13                 18.18%
2012        7.6               -41.54%

This throws out a 6 year average dividend growth of 7.62% which in itself is pretty good but a reduction of 41.54% in the last year would be sufficient to stop any dividend growth investor dead in his tracks.

If you take a look at the rights issue adjusted dividend history however it shows a different story.

            Dividend    Dividend Growth
2006        3.4                  
2007        3.8              11.76%
2008         4                 5.26%
2009        4.4              10.00%
2010        6.3               43.18%
2011        7.4               17.46%
2012        7.6                2.70%

Here the 6 year average dividend growth rises to 15.06% when you amend the dividends for the rights issue. Melrose also sporadically issue a return of capital to shareholders following the sale of companies, which took place in 2007 and 2011. These are a massive bonus but as these are incidental I've not included them in the dividend growth calculations above.

As such it can be seen that the dividend policy at Melrose is superb and they have a strong ethos of dividend growth. When I took a position the yield was around 4% however following the increase in price the yield has reduced to around 3%. Not a great yield for a dividend share so at these prices I probably wouldn't take a position but I currently have the view of holding for the long term.

Actual and adjusted dividend history can be seen here.