Redrow plc (LON:RDW) stock is about to trade ex-dividend in 4 days time. This means that investors who purchase shares on or after the 5th of March will not receive the dividend, which will be paid on the 9th of April.
Redrow’s next dividend payment will be UK£0.10 per share, on the back of last year when the company paid a total of UK£0.30 to shareholders. Based on the last year’s worth of payments, Redrow stock has a trailing yield of around 4.1% on the current share price of £7.46. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Redrow can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Fortunately Redrow’s payout ratio is modest, at just 35% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out more than three-quarters (76%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That’s why it’s comforting to see Redrow’s earnings have been skyrocketing, up 24% per annum for the past five years.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the last six years, Redrow has lifted its dividend by approximately 75% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
From a dividend perspective, should investors buy or avoid Redrow? From a dividend perspective, we’re encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.
Curious what other investors think of Redrow? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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