Forterra's (LON:FORT) Dividend Will Be Reduced To £0.01

Forterra plc (LON:FORT) is reducing its dividend from last year's comparable payment to £0.01 on the 11th of October. This means that the annual payment is 1.2% of the current stock price, which is lower than what the rest of the industry is paying.

View our latest analysis for Forterra

Forterra's Earnings Easily Cover The Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Before making this announcement, Forterra was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. This is a pretty unsustainable practice, and could be risky if continued for the long term.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 24%, which is in a comfortable range for us.

Forterra's Dividend Has Lacked Consistency

It's comforting to see that Forterra has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 8 years was £0.04 in 2016, and the most recent fiscal year payment was £0.02. Doing the maths, this is a decline of about 8.3% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth Potential Is Shaky

Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. Over the past five years, it looks as though Forterra's EPS has declined at around 32% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Forterra's Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Forterra (1 is a bit unpleasant!) that you should be aware of before investing. Is Forterra not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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