Yahoo Finance Don't Buy Redrow plc (LON:RDW) For Its Next Dividend Without Doing These Checks
Redrow plc (LON:RDW) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Redrow's shares before the 23rd of February to receive the dividend, which will be paid on the 6th of April.
The company's next dividend payment will be UK£0.10 per share. Last year, in total, the company distributed UK£0.32 to shareholders. Looking at the last 12 months of distributions, Redrow has a trailing yield of approximately 6.3% on its current stock price of £5.115. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for Redrow
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Redrow is paying out an acceptable 59% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Redrow generated enough free cash flow to afford its dividend. Redrow paid out more free cash flow than it generated - 150%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Redrow paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Redrow's ability to maintain its dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Redrow's earnings per share have fallen at approximately 5.0% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Redrow has delivered 46% dividend growth per year on average over the past nine years. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
Final Takeaway
Has Redrow got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Redrow.
With that being said, if you're still considering Redrow as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Redrow has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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