Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Biffa plc (LON:BIFF) has paid a dividend to shareholders in the last few years. It currently yields 3.6%. Let’s dig deeper into whether Biffa should have a place in your portfolio.
5 checks you should do on a dividend stock
Whenever I am looking at a potential dividend stock investment, I always check these five metrics:
- Is its annual yield among the top 25% of dividend-paying companies?
- Does it consistently pay out dividends without missing a payment of significantly cutting payout?
- Has it increased its dividend per share amount over the past?
- Can it afford to pay the current rate of dividends from its earnings?
- Will it be able to continue to payout at the current rate in the future?
How does Biffa fare?
The company currently pays out 65% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect BIFF’s payout to fall to 35% of its earnings. Assuming a constant share price, this equates to a dividend yield of 3.8%. However, EPS should increase to £0.15, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Unfortunately, it is really too early to view Biffa as a dividend investment. It has only been consistently paying dividends for 2 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
In terms of its peers, Biffa generates a yield of 3.6%, which is high for Commercial Services stocks but still below the market’s top dividend payers.
If you are building an income portfolio, then Biffa is a complicated choice since it has some positive aspects as well as negative ones. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three relevant factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for BIFF’s future growth? Take a look at our free research report of analyst consensus for BIFF’s outlook.
- Valuation: What is BIFF worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether BIFF is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.