At face value, Berkeley Group (LSE: BKG) looks to be an excellent dividend stock.With the housebuilder forecast to deliver earnings and dividends of 473p and 185p respectively this year, its forward P/E ratio is under nine and its dividend yield is almost 5%.However, if youre thinking of buying Berkeley for its big cash payouts, there are a couple of things you should know first.
The boss is cashing in
Theres no doubt UK housebuilding stocks have been cash cows for shareholders in recent years. The sector has momentum at the moment. Thats demonstrated in Berkeleys interim results released this morning.
For the half year, the group delivered 2,117 new homes and generated a pre-tax profit of 533m, up 36% on last year. Basic EPS rose 40% to 317p per share. However, while shareholder returns increased 26.2% to 163.2p for the period, its important to note that much of this periods return, was in the form of share buy-backs. The dividend for the period was actually reduced by 66% from 137p to 70.4p per share. Thats not what you want to see from a dividend investing perspective.
Income investors should also keep in mind the cyclical nature of the industry. This has important implications for dividend payouts. Looking at BKGs dividend history, the company paid shareholders NO dividends between 2005 and 2012. Once again, clearly not ideal if youre investing for income.
Lastly, while Chairman Tony Pidgley gave an upbeat assessment of the groups future prospects in todays update, its worth noting what hes doing with his own money. This year, Pidgley has been dumping stock like theres no tomorrow, selling almost 90m worth of shares. Directors dont sell on the lows. Given his track record of calling UK property cycles accurately, this is no doubt concerning.As a result, I wont be buying Berkeley for its 5% dividend.
Complicated dividend policy
Another FTSE 100 stock yielding over 5% that Im not so sure about is Admiral (LSE: ADM). The insurer has a trailing yield of 6.2% at the current share price.
While that yield sounds attractive, theres one thing that turns me off buying Admiral for its dividend its unorthodox policy.The companys policy is to pay 65% of its post-tax profits as a normal dividend and then to pay a further special dividend comprising of earnings not required to be held for solvency or buffers.
This means that it splits each interim and final dividend into normal/special dividends. Its a nightmare for data providers and its a nightmare trying to examine the companys dividend growth track record, which is one of the first things I do as a dividend investor. Ive included a table of the last five years dividends below, taken from Admirals website.
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Analysing that table, there are issues that stand out to me.
First, we can see the group actually cut its normal payout in both 2014 and 2016. Second, the most recent interim dividend was cut from 62.9p per share in 2016 to 56p in 2017. As a dividend investor, I look for companies that consistently increase their dividends. That way, I can build an income stream that grows every year. I dont like dividend cuts. Period.
Given the erratic nature of Admirals dividend history, I wont be buying the stock for its 6.2% trailing yield. The dividend policy just looks too complicated, in my view.