EasyJet (LON: EZJ) (EZJ.L) released its full-year FY2017 results earlier this week. The numbers weren’t brilliant.
While revenue rose 8.1% to £5,047m, earnings per share fell 24%, from 108.4p to 82.5p. Chief Executive Carolyn McCall (who’s leaving for ITV), described the results as a “robust performance during a difficult year for the aviation industry.”
Unfortunately, for dividend investors, the dividend payout was cut by 24%. A FY2017 full-year dividend of 40.9p per share was declared, down from 53.8p last year.
This wasn’t totally unexpected. Back in June, I wrote a short piece on easyJet’s dividend prospects and noted that a significant cut was on the horizon. At the time, analysts predicted a payout of 37.9p, so the actual payout has come in a little ahead of that.
However, this week’s cut shows the importance of actually looking into a company’s dividend policy.
Always check the dividend policy
In recent years, easyJet had lifted its dividend at an impressive rate. For example, for FY2013 the company paid 33.5p per share. By FY2015, the payout had increased 55.2p. That level of payout made the yield very competitive and increased the dividend appeal of the airline.
However, easyJet operates a very disciplined dividend policy. The company clearly states on its website that it has a ‘50% dividend payout ratio.’
That means that it will pay out 50% of its post tax income. If profits fall, the dividend gets reduced. It’s as simple as that.
A poor dividend growth stock
As a result, easyJet is not a great dividend growth stock, in my opinion. I wouldn’t consider it for my own portfolio.
Personally, I prefer to invest in companies with strong track records of consistent dividend growth. Or at the very least, three to four years of consistent increases.
My goal is to build an income stream that grows year after year. If a company is cutting its dividend by a quarter because profitability has declined, unfortunately, there’s no place for it in my portfolio.
Disclosure: Edward Sheldon, CFA has no position in easyJet at the time of writing.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.