Ibstock (LON:IBST) Has Announced That Its Dividend Will Be Reduced To £0.015

The board of Ibstock plc (LON:IBST) has announced that the dividend on 13th of September will be reduced by 56% from last year's £0.034 to £0.015. However, the dividend yield of 3.8% still remains in a typical range for the industry.

See our latest analysis for Ibstock

Ibstock's Earnings Easily Cover The Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. Prior to this announcement, the dividend made up 276% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

Analysts expect a massive rise in earnings per share in the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 41%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Ibstock's Dividend Has Lacked Consistency

Looking back, Ibstock's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2016, the dividend has gone from £0.044 total annually to £0.07. This implies that the company grew its distributions at a yearly rate of about 6.0% over that duration. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

The Dividend Has Limited Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Ibstock's EPS has fallen by approximately 36% per year during the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

Ibstock's Dividend Doesn't Look Great

To sum up, we don't like when dividends are cut, but in this case the dividend may have been too high to begin with. The company isn't making enough to be paying as much as it is, and the other factors don't look particularly promising either. The dividend doesn't inspire confidence that it will provide solid income in the future.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 4 warning signs for Ibstock (of which 1 is significant!) you should know about. 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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