Is It Worth Considering The Berkeley Group Holdings plc (LON:BKG) For Its Upcoming Dividend?

It looks like The Berkeley Group Holdings plc (LON:BKG) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 4th of March will not receive this dividend, which will be paid on the 19th of March.

Berkeley Group Holdings's next dividend payment will be UK£0.091 per share, on the back of last year when the company paid a total of UK£2.06 to shareholders. Looking at the last 12 months of distributions, Berkeley Group Holdings has a trailing yield of approximately 2.9% on its current stock price of £40.53. 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 Berkeley Group Holdings can afford its dividend, and if the dividend could grow.

See our latest analysis for Berkeley Group Holdings

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Berkeley Group Holdings's payout ratio is modest, at just 39% 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. Berkeley Group Holdings paid out more free cash flow than it generated - 132%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Berkeley Group Holdings does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Berkeley Group Holdings 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 Berkeley Group Holdings'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?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Berkeley Group Holdings's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past eight years, Berkeley Group Holdings has increased its dividend at approximately 18% a year on average.

To Sum It Up

Is Berkeley Group Holdings worth buying for its dividend? It's disappointing to see earnings per share have fallen slightly, even though Berkeley Group Holdings is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that being said, if you're still considering Berkeley Group Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 2 warning signs for Berkeley Group Holdings that we recommend you consider before investing in the business.

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.

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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. 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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