Dividend paying stocks like Lendlease Group (ASX:LLC) tend to be popular with investors, and for good reason – some research suggests a significant amount of all stock market returns come from reinvested dividends. Unfortunately, it’s common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
A high yield and a long history of paying dividends is an appealing combination for Lendlease Group. We’d guess that plenty of investors have purchased it for the income. Remember that the recent share price drop will make Lendlease Group’s yield look higher, even though recent events might have impacted the company’s prospects. Some simple research can reduce the risk of buying Lendlease Group for its dividend – read on to learn more.
Explore this interactive chart for our latest analysis on Lendlease Group!
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Lendlease Group paid out 80% of its profit as dividends. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Lendlease Group paid out 82% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It’s positive to see that Lendlease Group’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Is Lendlease Group’s Balance Sheet Risky?
As Lendlease Group 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 measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Lendlease Group has net debt of 9.39 times its EBITDA, which implies meaningful risk if interest rates rise of earnings decline.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. With EBIT of 1.46 times its interest expense, Lendlease Group’s interest cover is starting to look a bit thin. High debt and weak interest cover are not a great combo, and we would be cautious of relying on this company’s dividend while these metrics persist.
Remember, you can always get a snapshot of Lendlease Group’s latest financial position, by checking our visualisation of its financial health.
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of Lendlease Group’s dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was AU$0.32 in 2010, compared to AU$0.60 last year. Dividends per share have grown at approximately 6.5% per year over this time. Lendlease Group’s dividend payments have fluctuated, so it hasn’t grown 6.5% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It’s good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Lendlease Group might have put its house in order since then, but we remain cautious.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Lendlease Group’s EPS have fallen by approximately 13% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Lendlease Group’s earnings per share, which support the dividend, have been anything but stable.
To summarise, shareholders should always check that Lendlease Group’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Lendlease Group’s is paying out more than half its income as dividends, but at least the dividend is covered by both reported earnings and cashflow. Earnings per share are down, and Lendlease Group’s dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think Lendlease Group may not be an ideal dividend stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we’ve come accross 5 warning signs for Lendlease Group you should be aware of, and 1 of them is significant.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at [email protected] 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.
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