DFS Furniture (LON:DFS) Will Pay A Smaller Dividend Than Last Year

DFS Furniture plc (LON:DFS) is reducing its dividend from last year's comparable payment to £0.037 on the 29th of December. This means that the dividend yield is 6.8%, which is a bit low when comparing to other companies in the industry.

View our latest analysis for DFS Furniture

DFS Furniture's Payment Has Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Based on the last payment, DFS Furniture was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

Looking forward, earnings per share is forecast to rise by 81.8% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 49% by next year, which is in a pretty sustainable range.

DFS Furniture's Dividend Has Lacked Consistency

Looking back, DFS Furniture's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2014, the annual payment back then was £0.062, compared to the most recent full-year payment of £0.074. This means that it has been growing its distributions at 2.2% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

DFS Furniture May Find It Hard To Grow The Dividend

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. However, DFS Furniture's EPS was effectively flat over the past five years, which could stop the company from paying more every year. DFS Furniture is struggling to find viable investments, so it is returning more to shareholders. This isn't necessarily bad, but we wouldn't expect rapid dividend growth in the future.

Our Thoughts On DFS Furniture's Dividend

Overall, we think that DFS Furniture could make a reasonable income stock, even though it did cut the dividend this year. The dividend has been at reasonable levels historically, but that hasn't translated into a consistent payment. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 2 warning signs for DFS Furniture that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.