Forterra plc (LON:FORT) has announced that it will be increasing its dividend from last year's comparable payment on the 7th of July to £0.101. This takes the dividend yield to 7.6%, which shareholders will be pleased with.
View our latest analysis for Forterra
Forterra's Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Forterra's dividend was only 54% of earnings, however it was paying out 98% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.
EPS is set to fall by 11.1% over the next 12 months. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 62%, which is comfortable for the company to continue in the future.
Forterra's Dividend Has Lacked Consistency
Forterra has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. The dividend has gone from an annual total of £0.04 in 2017 to the most recent total annual payment of £0.147. This implies that the company grew its distributions at a yearly rate of about 24% over that duration. Forterra 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. Earnings has been rising at 3.7% per annum over the last five years, which admittedly is a bit slow. Growth of 3.7% per annum is not particularly high, which might explain why the company is paying out a higher proportion of earnings. This could mean the dividend doesn't have the growth potential we look for going into the future.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Forterra's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 2 warning signs for Forterra (1 doesn't sit too well with us!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.