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Barratt Developments plc (LON:BDEV) has announced that on 18th of May, it will be paying a dividend of£0.102, which a reduction from last year's comparable dividend. The dividend yield of 7.7% is still a nice boost to shareholder returns, despite the cut.
See our latest analysis for Barratt Developments
Barratt Developments' Earnings Easily Cover The Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, Barratt Developments was quite comfortably earning enough to cover the dividend. This indicates that quite a large proportion of earnings is being invested back into the business.
Over the next year, EPS is forecast to expand by 2.3%. If the dividend continues on this path, the payout ratio could be 67% by next year, which we think can be pretty sustainable going forward.
Barratt Developments' Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. The dividend has gone from an annual total of £0.025 in 2014 to the most recent total annual payment of £0.359. This works out to be a compound annual growth rate (CAGR) of approximately 34% a year over that time. Barratt Developments has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
The Dividend's Growth Prospects Are Limited
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's not great to see that Barratt Developments' earnings per share has fallen at approximately 2.4% per year over the past five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
In Summary
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 4 warning signs for Barratt Developments (1 doesn't sit too well with us!) that you should be aware of before investing. Is Barratt Developments not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.