A dividend stock I’d avoid if I were you!

Buyer beware! This high-risk dividend stock could be a major disappointment, says Royston Wild.

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Savills (LSE: SVS) is one big-yielding dividend stock I’m avoiding right now. I don’t care about its inflation-mashing 4.2% forward yield. Its rock-bottom forward P/E ratio around 10 times holds zero appeal either. With home sales on the verge of collapse, I consider the estate agency too risky by far.

Brexit uncertainty has been decking business at Savills in recent times. The colossal political and economic uncertainty has seen the number of overall property listings sink during the past couple of years. It’s a saga that remains a long way off being resolved too. The coronavirus crisis though, is a problem that threatens to rip out the heart of the market.

Sales to slump

A study by home sellers Knight Frank illustrates the point perfectly. It suggests home sales will slump 38% in 2020 to number just 734,000. A small consolation to London-focussed Savills is that there’ll be “slightly smaller falls” in Greater London and in the ‘Prime Central London’ market, according to the data. House prices nationwide will drop 3% year-on-year too, it predicts.

In sunnier news, Knight Frank expects sales and prices to rise 18% and 8% respectively in 2021. However, it doesn’t expect next year’s improved market to completely absorb the blow of this year. The agent predicts that “of the nearly 526,000 sales we expect to be ‘lost’ this year, fewer than half will be carried into 2021.”

Lockdown to last?

Its bearish analysis comes as no surprise. New sales enquiries have dived by almost half since the government published advice for would-be buyers and sellers. In line with other social distancing advice, ministers have advised homeowners “not let people visit your property for viewings”. It has also prohibited calls from estate agents, photographers, energy performance certificate experts and other professionals.

It’s hoped the lockdown measures will begin to ease by the summer. But don’t bank on it, I say. We all want to get out and about as soon as possible and the government is eager to loosen the leash. However, a sharply-accelerating infection rate would suggest current timescales could be thrown out the window. Some 5,903 more people tested positive for the coronavirus on Sunday, soaring from 3,735 a day earlier.

A dicey dividend stock

Savills has taken action on the dividend given what it deems “current uncertainty over the impact of COVID-19 on global real estate market activity in the coming months.” Last week, it said it was axing final ordinary and supplemental interim dividends. Although it added it would consider paying an enhanced interim dividend around the time of its AGM in June.

I warn against Savills shareholders getting their hopes up though. Clearly the homes market could be in a state of disarray for the next couple of years, and with this group profits could well tank.

The estate agent’s balance sheet is strong and it will look to keep it that way, given current uncertainty. This is a share, therefore, I think will likely disappoint on the dividend front in 2020, and possibly beyond too.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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