DFS Furniture Plc’s (LON:DFS) dividend is being reduced from last year’s payout covering the same period to £0.037 on 29th December. The yield is still above the industry average at 5.2%.
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DFS Furniture dividend is well covered by earnings
If the payments aren’t sustainable, a high yield for a few years won’t matter as much. Prior to this announcement, DFS Furniture’s dividend was comfortably covered by cash flow and earnings. This indicates that a large proportion of earnings are being invested back into the business.
Looking ahead, earnings per share are expected to increase by 22.8% next year. Assuming the dividend continues to follow recent trends, we think the payout rate could be 73% next year, which is in a pretty sustainable range.
DFS Furniture dividend is inconsistent
Looking back, the DFS Furniture dividend was not particularly consistent. This suggests that the dividend may not be the most reliable. Since 2014, the annual payment at the time was £0.062, compared to the most recent annual payment of £0.074. This means that its distributions have been growing by 2.2% per year over this time. It’s encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would wipe out most of the growth anyway, which makes it less attractive as an income investment.
Prospects for dividend growth are limited
Increasing earnings per share can be a mitigating factor when considering past fluctuations in the dividend. Though it’s important to note that DFS Furniture’s earnings per share have basically not grown since five years ago, which could erode the dividend’s purchasing power over time. The 0.2% growth may indicate that the company has limited investment opportunities, so it is returning its earnings to shareholders. That’s not necessarily a bad thing, but we wouldn’t expect rapid dividend growth in the future.
Our thoughts on the DFS Furniture dividend
Although the dividend was cut this year, we believe that DFS Furniture has the ability to make consistent payments in the future. While the payout ratios are a good sign, we’re less than thrilled with the company’s record dividend. The dividend looks good, but there have been some issues in the past, so we would be a little cautious.
Companies that have a stable dividend policy are likely to be more interested by investors than those that suffer from a more inconsistent approach. However, there are other things for investors to consider when analyzing stock performance. Taking the debate a step further, we identify 2 warning signs for DFS Furniture that investors need to be aware of moving forward. Is DFS Furniture not quite the opportunity you were looking for? Why not check out our selection of higher dividend stocks.
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