Some Irish companies could well afford to pay larger dividendsto their investors, writes Una McCaffrey.

At least nine Irish listed companies could afford to increase the dividend they pay to shareholders without putting stress on their balance sheet, according to an analysis from Goodbody Stockbrokers.

The broker's research, Payback Time, shows that, in general, Irish companies have a greater capacity to pay increased dividends than their European counterparts since the yields they offer are, on average, 30 per cent lower.

ISEQ constituents will have to face this reality over the coming decade, Goodbody believes, as return on capital and a focus on growth no longer justify low payouts.

From an investment perspective, Goodbody advises that "great care" must be taken when choosing stocks on the basis of their dividend potential.

The broker's "preferred" yield stocks are those that offer both yield and good cover.

It highlights McInerney, Kingspan, Abbey and Donegal Creameries in this regard, since they have a dividend yield in excess of 3 per cent with a minimum dividend cover of three times and interest cover of more than four times.

None of the exchange's top 10 largest stocks qualify under this criteria, but companies that come close and compensate in other ways include Grafton, ICG, DCC, Heiton and Fyffes, according to Goodbody.

The research identifies market heavyweight CRH among those stocks with room to manoeuvre on dividends.

"CRH's average payout of 22 per cent [of attributable profit\] over the past five years compares with 38 per cent and 29 per cent for its European and US peers. Clearly it can afford to pay a higher dividend," the broker says.

Goodbody suggests that food group Kerry could also afford to pay more, since its average payout of 12 per cent is dwarfed by payouts of between 40 and 50 per cent for comparable companies abroad.

"We believe the company could increase its payout to 25 per cent without interfering with its growth strategy," Goodbody says.

Within the stock exchange's range of second-liners, Goodbody believes housebuilder Abbey could use the strength of its balance sheet to pay more special dividends. The company made a similar move in 2000 and 2001.

DCC could also consider special dividends, the broker suggests, although it notes that a share buyback is also "a realistic possibility".

Either way, a higher on-going dividend would be affordable, according to the analysis.

Irish Continental Group (ICG), could also be in a position to consider a special dividend while buying back shares, Goodbody believes.

Other smaller stocks where an increased dividend would not break the bank include cash-rich companies such as Fyffes and IAWS, the analysis suggests.

While a change in policy is not in the offing, IAWS offers a "good possibility" of higher dividends going forward, according to Goodbody.

The broker suggests that a raised dividend could also be managed at building materials firm Kingspan, where cover remains high at six times despite a 30 per cent annual rise in payouts over the past five years.

McInerney, which raised its payout from 7.6 per cent to 12.5 per cent between 2000 and 2001, also has space for more growth, Goodbody advises.

"There is potential for dividend growth to surpass forecasts by a significant margin," the research says.

Three companies that occupy the opposite end of the spectrum - whereby payout ratios are already very high - are IWP, Waterford Wedgwood and Independent News & Media.

Goodbody warns, however, that IWP dividends are due to be cut and says that Waterford Wedgwood should take the same action.

"We believe the long-term interests of the company would be best-served by focusing on reducing debt, including a lower dividend," Goodbody advises.

According to the broker, Independent News & Media is in a position to maintain dividends at current levels for the next three years.

The company is currently offering a payout ratio of 65 per cent and, when re-capitalisation was required recently, opted for a rights issue rather than a reduction in its dividend.

Goodbody expresses some concern about this policy, suggesting that it may be "over-generous" in the context of the re-capitalisation. A significant recovery in advertising will be required if current returns are to comfortably maintained beyond 2005, the broker warns.

Among the 10 largest Irish listed companies, just four are getting their dividend right, according to Goodbody.

It would be "inappropriate" to change dividend policy at AIB, Bank of Ireland or Anglo Irish Bank, the broker says.

However, it predicts that AIB and Bank of Ireland could increase payouts "over time" as management concentrate on domestic matters rather than overseas expansion.

Goodbody says it is "happy" for smaller banking player Anglo Irish to retain its relatively low payouts as long as the stock's return on equity remains around current levels of 30 per cent.

Ryanair should also stick with current strategy, the analysis recommends. It says dividend payouts would amount to "a significant opportunity cost" for the airline as long as it continues to expand rapidly.

It suggests, for example, that a payout ratio of 33 per cent this year would produce a yield of just 1.8 per cent.

"We suspect a payout of this nature would not encourage support for the stock," the broker concludes.

In general, Irish companies tend to follow the US pattern of dividend payouts rather than tailing their European counterparts, according to Goodbody.

The broker suggests that the uncertainty which prevails in global investment markets could see more emphasis placed on dividends however, as pension fund trustees use dividend policy to inform their stock picks.

"In the 2000s so far, dividends have provided the only positive cashflow for investors from their shareholdings," the analysis finds.