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Berkeley Group Holdings plc: a 5% dividend stock with a P/E under 10

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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 you’re thinking of buying Berkeley for its big cash payouts, there are a couple of things you should know first.

The boss is cashing in 

There’s no doubt UK housebuilding stocks have been cash cows for shareholders in recent years. The sector has momentum at the moment. That’s demonstrated in Berkeley’s interim results released this morning.

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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, it’s important to note that much of this period’s 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. That’s 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 BKG’s dividend history, the company paid shareholders NO dividends between 2005 and 2012. Once again, clearly not ideal if you’re investing for income. 

Lastly, while Chairman Tony Pidgley gave an upbeat assessment of the group’s future prospects in today’s update, it’s worth noting what he’s doing with his own money. This year, Pidgley has been dumping stock like there’s no tomorrow, selling almost £90m worth of shares. Directors don’t sell on the lows. Given his track record of calling UK property cycles accurately, this is no doubt concerning. As a result, I won’t be buying Berkeley for its 5% dividend.

Complicated dividend policy 

Another FTSE 100 stock yielding over 5% that I’m 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, there’s one thing that turns me off buying Admiral for its dividend – its unorthodox policy. The company’s 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. It’s a nightmare for data providers and it’s a nightmare trying to examine the company’s dividend growth track record, which is one of the first things I do as a dividend investor. I’ve included a table of the last five years’ dividends below, taken from Admiral’s website.

    Total Normal Special
2017 Interim 56.0 37.9 18.1
         
2016 Final 51.5 15.0 36.5
2016 Interim 62.9 36.8 26.1
    114.4 51.8 62.6
2015 Final 63.4 33.6 29.8
2015 Interim 51.0 25.1 25.9
    111.4 58.7 55.7
2014 Final 49.0 22.5 26.5
2014 Interim 49.4 23.7 25.7
    98.4 46.2 52.2
2013 Final 50.6 24.4 26.2
2013 Interim 48.9 22.5 26.4
    99.5 46.9 52.6
2012 Final 45.5 21.4 24.1
2012 Interim 45.1 21.3 23.8
    90.6 42.7 47.9

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 don’t like dividend cuts. Period.

Given the erratic nature of Admiral’s dividend history, I won’t be buying the stock for its 6.2% trailing yield. The dividend policy just looks too complicated, in my view.

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Edward Sheldon has no position in any 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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