The stock market has been very volatile in recent months due to the coronavirus crisis. Therefore, many investors might look to invest in stable dividend stocks that would provide predictable income. Burberry Group (LSE: BRBY) is an iconic global household name in the world of fashion. It has been paying a dividend for more than 10 years.
But with the recent pandemic, sales fell 3% to £2.6bn after it was forced to close the majority of its stores in mainland China in February. There were significant declines in store visitors that remained open and operated with reduced hours.
Burberry stock is currently trading at £14 at the time of this writing. This is 40% below its all-time high in January this year.
Burberry Group: going back to the fundamentals
The debt-to-equity ratio has also increased from 4.5% to 28% at the end of 2019. The good news is that it has £929 million in cash, which is well above its debt level. Burberry Group has cancelled its final dividend payment this year to shore up cash as sales plunged 27% in its fourth quarter. And there will be significant pressure on the luxury consumer for months ahead.
There are some metrics we can look at to assess whether Burberry can resume its dividend payments in the future. If you are an income investor and want to buy Burberry Group for its dividend, you should always find out whether its dividend is reliable and sustainable. There is no point in buying a stock if its dividend is regularly being cut or is not reliable. Therefore, we should always check whether the company’s earning is growing since dividends are typically paid from company’s earnings. Burberry has had a steady growth of 3.4% earnings per share in the past five years on average, which is in line with the industry norm.
The payout ratio
We should also pay attention to the payout ratios, which indicates how much dividends are being paid out from its earnings. Burberry Group paid out 49% of its profit as dividends last year. This is a medium payout level that leaves enough capital to reinvest back into the business for future growth. It also leaves room for future increases of dividends payout.
One other important metric to look at is its historical dividend growth rate. Burberry Group has delivered an average of 13% increase annually in its dividend in the past ten years. This is a good indication of potential future dividend growth as we can see while earnings are growing, the company is rewarding its shareholders accordingly.
Buy the dip
Has Burberry Group got what it takes to resume its dividend payments? Earnings per share have been growing moderately in the past five years, and Burberry’s payout ratio was less than half its earnings. This suggests the company is investing in growth. Burberry is an iconic and internationally recognised brand with loyal customers especially in Asia. Burberry Group’s revenue and profit margin will suffer in the short term. But when the pandemic is over and retail operations are back to normal, I believe it will reinstate its dividends.
Now presents the opportunity to buy retail shares while the company is still trading at a good discount from its all-time high. Retailers will benefit from pent-up demand after months of lockdown and shoppers will be excited to return to stores as long as there are appropriate social distancing measures and hygiene practices in place. Furthermore, over 40% of Burberry Group’s revenue generates from Asia-Pacific region. Recent news indicates that China’s economic recovery is showing signs of improvement, which is great news for the company and shareholders.
Ellen Leung has no position in any of the shares mentioned. . The Motley Fool UK has recommended Burberry. 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.