Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Could St. Modwen Properties PLC (LON:SMP) be an attractive dividend share to own for the long haul? Investors are often drawn to a company for its dividend. Unfortunately, one common occurrence with dividend companies is for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Investors might not know much about St. Modwen Properties’s dividend prospects, even though it has been paying dividends for the last nine years and offers a 1.7% yield. While the yield may not look too great, the relatively long payment history is interesting. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.Explore this interactive chart for our latest analysis on St. Modwen Properties!
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. St. Modwen Properties paid out 26% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, St. Modwen Properties paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.
Is St. Modwen Properties’s Balance Sheet Risky?
As St. Modwen Properties has a meaningful amount of debt, we need to check its balance sheet to see if the company might have debt risks. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA is a measure of a company’s total debt. Net interest cover measures the ability to meet interest payments on debt. Essentially we check that a) a company does not have too much debt, and b) that it can afford to pay the interest. St. Modwen Properties has net debt of more than 3x its EBITDA, which is getting towards the limit of most investors’ comfort zones. Judicious use of debt can enhance shareholder returns, but also adds to the risk if something goes awry.
We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. With EBIT of 3.82 times its interest expense, St. Modwen Properties’s interest cover is starting to look a bit thin.
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. Looking at the last decade of data, we can see that St. Modwen Properties paid its first dividend at least nine years ago. It’s good to see that St. Modwen Properties has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was UK£0.02 in 2010, compared to UK£0.071 last year. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. St. Modwen Properties’s dividend payments have fluctuated, so it hasn’t grown 15% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It’s not great to see that the payment has been cut in the past. We’re generally more wary of companies that have cut their dividend before, as they tend to perform worse in an economic downturn.
Dividend Growth Potential
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. In the last five years, St. Modwen Properties’s earnings per share have shrunk at approximately 4.1% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, the company has a conservative payout ratio, although we’d note that its cashflow in the past year was substantially lower than its reported profit. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In summary, St. Modwen Properties has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are likely more attractive alternatives out there.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in St. Modwen Properties stock.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.