Is this massive dividend yield in danger of being cut?

With an 8% dividend yield, could this company keep rewarding shareholders with a big pay out or is a cut looming? Andy Ross takes a look.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Crest Nicholson (LSE: CRST) shares have been doing pretty well, all things considered. Over one year they’ve gained around 13% and, despite a 12% drop in the last month, they’re still up very slightly over the course of 2020 so far.

So, the shares have some momentum – likely as a result of housebuilders generally being so undervalued, as I’ve argued before. This situation is the result of a combination of issues relating to sector executive pay, investigations into build quality, fears about the end of help to buy, economic worries, and Brexit. That’s quite a list to be contending with. But the depressed share prices of housebuilders has tended to push up their dividend yields. 

The dividend

Crest Nicholson has a massive 8% dividend yield. The problem now is that the dividend is not growing and the dividend cover – which historically has been good, at around two – is now falling. 

If earnings continue to fall at Crest Nicholson, there’s a real danger that at some point in the coming years the bumper payout may have to be cut. Usually, that also results in a short-term plummet in the share price – especially if the dividend yield is one of the main reason investors want to own the shares – as is probably the case with Crest Nicholson.

What do its results show

Preliminary results announced for the year ended 31 October 2019 showed pre-tax profits tumbled 39% to £102.7m. This fell short of the guidance of £120-130m it issued following last October’s profit warning.

The group is also battling with falling margins. These declined from 16.2% to 12.2%. It means they are well below those of rivals such as Persimmon. On the flip side, it gives management room for improvement which could filter into better earnings in future.

Crest Nicholson, which mainly operates in London and the South East of England, noted that house prices had fallen in its territories since the 2016 EU referendum. Overall, though, this seems an attractive part of the market to be in in the long term. House prices historically have tended to rise in these regions.

Risk of a cut

In the short term, I think the risk of a cut has got to be considered a very real possibility. It’s good to see that management has held the dividend at the same level – perhaps delaying the need for a cut and giving it time to improve the business.

I think investing in Crest Nicholson based on the yield alone is not enough. It’d be much better to look for a slightly lower overall yield but one that is still growing and well covered by earnings. To invest now you need to have confidence that Crest Nicholson can up its margins and avoid any further profit warnings. Otherwise the share price is likely to fall.

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.

Andy Ross owns shares in Persimmon. 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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »