Is Burberry Group plc A Super Income Stock?

Does Burberry Group plc (LON: BRBY) have the right credentials to be classed as a very attractive income play?

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Although shares in Burberry (LSE: BRBY) (NASDAQOTH: BURBY.US) have beaten the FTSE 100 over the last year, being up over 5% while the FTSE 100 is up around 3% at the time of writing, it’s been a disappointing 2014 for investors in the company.

That’s because shares have lagged the wider index, at least partly due to doubts surrounding the long-term sustainability of the emerging market growth story (an area Burberry is focused upon for sales). However, does the share price fall in 2014 mean that Burberry’s yield is much more attractive? Could Burberry even be classed as a super income stock?

Dividends

Despite the recent weakness in its share price, Burberry’s yield is still considerably below the FTSE 100 yield of around 3.5%. Indeed, shares currently yield 2.3% and, although this is above current levels of inflation and is better than the interest received on a typical high street savings account, it is still not exactly a high-yielding share.

However, Burberry is taking steps to try and change this, as can be seen with the impressive dividend growth prospects that shares currently offer. Dividends per share are forecast to grow by 10.7% in the current financial year (to March 2015) and by 10.2% in the following year. This is well-above the growth rate of many of its peers and means that Burberry could be yielding 2.8% within two years.

This still isn’t particularly high, but there is scope for a better yield in the long run. Burberry currently pays out just 41% of profits as a dividend and, although the company has an aversion to debt and needs capital to expand, it could be argued that expansion could still take place while shareholders also benefit from a higher income. In other words, Burberry seems able to afford to pay out a greater proportion of profits as a dividend and doing so would mean a better yield for investors.

Looking Ahead

Trading on a price to earnings (P/E) ratio of 16.5, Burberry is not cheap when compared to the index P/E of 13.2. However, the company continues to have strong growth prospects and a highly valuable brand. Furthermore, its dividend payout ratio has the scope to be increased significantly, while the company is forecast to grow dividends considerably over the next two years. While a yield of 2.3% means it cannot be classed as a super income stock at present, Burberry certainly has the potential to become a great income play.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter does not own shares in Burberry. The Motley Fool has recommended shares in Burberry.

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