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DFS Furniture plc's (LON:DFS) dividend is being reduced from last year's payment covering the same period to £0.015 on the 25th of May. This means that the annual payment will be 2.3% of the current stock price, which is in line with the average for the industry.
See our latest analysis for DFS Furniture
DFS Furniture's Earnings Easily Cover The Distributions
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Based on the last payment, DFS Furniture 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 74.6%. If the dividend continues on this path, the payout ratio could be 20% by next year, which we think can be pretty sustainable going forward.
DFS Furniture's Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 8 years was £0.062 in 2015, and the most recent fiscal year payment was £0.03. This works out to be a decline of approximately 8.7% per year over that time. A company that decreases its dividend over time generally isn't what we are looking for.
The Dividend's Growth Prospects Are Limited
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. Over the past five years, it looks as though DFS Furniture's EPS has declined at around 2.0% a year. 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. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
In Summary
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. 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.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, DFS Furniture has 3 warning signs (and 1 which is potentially serious) we think you should know about. Is DFS Furniture not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.