In these turbulent times, passive income becomes even more important. Therefore, I like to buy companies with healthy dividends. Healthy in this context means both fairly high yielding, yet also sustainable. Bellway (LSE: BWY) is one company I’m particularly keen on, especially after it announced a 28.6% hike in its interim dividend. This came after the FTSE 250 stock was able to report increased half-year profits.
The half-year results for the housebuilder were strong across the board. Indeed, all the major metrics were up in comparison to the same period last year. This included a 3.5% year-on-year rise in revenues to £1.78bn and a 11.6% rise in operating profits to £332.2m. Profit margins were also able to increase by 1.4% to 18.7%, thanks to “price optimisation” and “disciplined cost control”.
Most importantly, these strong results have also allowed larger shareholder returns, with the interim dividend up to 45p per share. Therefore, the total dividend for the year yields more than 5%, more than the majority of other FTSE 250 stocks. The dividend cover is also extremely strong, totalling around three times underlying earnings for the full financial year. This still allows investment into the rest of the company. By July 2024, it intends to reduce cover to around 2.5 times underlying earnings, which I feel is still perfectly sustainable, and will hopefully see the dividend continue to increase.
Why did the Bellway share price still fall?
Despite these excellent results, the Bellway share price still fell over 3% yesterday. This was mainly because there were some questions over the firm’s potential future liability for historical fire safety issues. As a result, Bellway has had to put aside £186.8m since 2017, and there are some fears that it may have to set aside more to fix fire safety issues over a longer timeframe. This may jeopardise the large dividend payouts.
Further, although it has dealt with the issues of inflation well so far, CEO Jason Honeyman, expects further inflation, which will increase costs. Although there’s hope that this cost growth will be offset by the increasing cost of houses, there’s equally the worry that this will cause a lack of demand in the housing market. This would potentially see profits and the dividend decrease in the future.
What am I doing with this FTSE 250 stock?
So far, Bellway is performing excellently, and in the results, there’s no sign of any reduced demand. Indeed, as of March 2022, the forward order book was just under 7,500 homes, compared to 6,000 homes at the same time last year. Therefore, the fear that demand will wane is not based on official evidence.
In addition, Bellway trades on a price-to-earnings ratio of under 7. This is very low and indicates that the housebuilder may be severely undervalued. For these reasons, I think this FTSE 250 stock is a no-brainer buy for me, and at its current price, may add some to my portfolio.