DFS Furniture (LON:DFS) Has Announced That Its Dividend Will Be Reduced To £0.03

The board of DFS Furniture plc (LON:DFS) has announced it will be reducing its dividend by 19% from last year's payment of £0.037 on the 29th of December, with shareholders receiving £0.03. However, the dividend yield of 4.3% is still a decent boost to shareholder returns.

See our latest analysis for DFS Furniture

DFS Furniture's Earnings Easily Cover The Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, DFS Furniture was quite comfortably earning enough to cover the dividend. This means that a large portion of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to rise by 89.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 24%, which is in the range that makes us comfortable with the sustainability of the dividend.

DFS Furniture's Dividend Has Lacked Consistency

DFS Furniture has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. The dividend has gone from an annual total of £0.062 in 2014 to the most recent total annual payment of £0.045. Doing the maths, this is a decline of about 3.5% per year. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend's Growth Prospects Are Limited

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. However, DFS Furniture has only grown its earnings per share at 2.4% per annum over the past five years. The company has been growing at a pretty soft 2.4% per annum, and is paying out quite a lot of its earnings to shareholders. This isn't bad in itself, but unless earnings growth pick up we wouldn't expect dividends to grow either.

In Summary

Even though the dividend was cut this year, we think DFS Furniture has the ability to make consistent payments in the future. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, DFS Furniture has 3 warning signs (and 1 which is significant) we think you should know about. Is DFS Furniture not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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