Housebuilder Bellway (LON: BWY) (BWY.L) reported a solid set of full-year results yesterday, recording a 10.6% rise in completions for the year. Revenue rose 14.2%, operating profit increased 16.2% and earnings per share increased 12.7% to 370.6p. The dividend was increased 13%, to 122p.
With a current yield of 3.3%, is Bellway a good dividend stock?
Housebuilders have enjoyed a strong run in recent years. This has resulted in many housebuilders paying out significant cash dividends to their shareholders. For example, Bellway has increased its revenues from £1,004m to £2,559m in the last five years. This has enabled the company to record 5-year dividend growth of an exceptional 44%.
A glance at Bellway’s key statistics reveals everything a dividend investor might want to see. The 3.3% dividend yield is respectable, dividend growth has been prolific, dividend coverage is excellent and the valuation of the stock is low at a P/E of just 9.8. What’s not to like?
However, the one thing that deters me from investing in Bellway and the other housebuilders for their dividends is the cyclical nature of the housebuilding industry. An examination of the company’s long-term dividend history reveals something that all dividend investors need to see.
Source: Data: Bellway, Chart: Dividend Wealth
Looking back to the Financial Crisis, Bellway cut its dividend, quite significantly in both 2008 and 2009. Indeed, after paying out dividends of 43p in 2007, the payout was reduced to 24p in 2008 and then to 9p in 2009. That’s a huge cut and clearly not ideal if your goal, like mine, is to build up a consistent stream of dividend income.
Could Bellway cut its dividend like that in the future? That’s hard to answer, however, Brexit most likely does pose a risk to profitability, in my view.
For now, I believe Bellway’s dividend is safe. The company has a strong order book of over 5,000 homes, and dividend coverage of three times. So there’s no indication to suggest the dividend is at risk in the short term. However, the company’s low valuation suggests to me that many investors are skeptical that the current momentum can continue forever.
Disclosure: Edward Sheldon, CFA has no position in Bellway.
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.