Bellway (LON:BWY) Is Increasing Its Dividend To UK£0.45

The board of Bellway p.l.c. (LON:BWY) has announced that it will be increasing its dividend on the 1st of July to UK£0.45. Although the dividend is now higher, the yield is only 5.0%, which is below the industry average.

Check out our latest analysis for Bellway

Bellway's Earnings Easily Cover the Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, Bellway's dividend was only 38% of earnings, however it was paying out 1,545% of free cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

The next year is set to see EPS grow by 9.6%. Assuming the dividend continues along recent trends, we think the payout ratio could be 35% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from UK£0.13 to UK£1.18. This works out to be a compound annual growth rate (CAGR) of approximately 25% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Bellway May Find It Hard To Grow The Dividend

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Although it's important to note that Bellway's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Bellway will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for Bellway that investors need to be conscious of moving forward. Is Bellway not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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