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Is It Smart To Buy Barratt Developments PLC (LON:BDEV) Before It Goes Ex-Dividend?

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  • BDEV.L

Barratt Developments PLC (LON:BDEV) stock is about to trade ex-dividend in 2 days time. Investors can purchase shares before the 10th of October in order to be eligible for this dividend, which will be paid on the 5th of November.

Barratt Developments's upcoming dividend is UK£0.4 a share, following on from the last 12 months, when the company distributed a total of UK£0.5 per share to shareholders. Calculating the last year's worth of payments shows that Barratt Developments has a trailing yield of 7.5% on the current share price of £6.206. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Barratt Developments can afford its dividend, and if the dividend could grow.

View our latest analysis for Barratt Developments

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Barratt Developments paid out a comfortable 40% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 78% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's positive to see that Barratt Developments's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:BDEV Historical Dividend Yield, October 7th 2019
LSE:BDEV Historical Dividend Yield, October 7th 2019

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Barratt Developments's earnings per share have risen 19% per annum over the last five years. It paid out more than three-quarters of its earnings in the last year, even though earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we'd wonder why management are not reinvesting more in the business.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Barratt Developments has delivered an average of 63% per year annual increase in its dividend, based on the past six years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Is Barratt Developments worth buying for its dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Barratt Developments paid out less than half its earnings and a bit over half its free cash flow. There's a lot to like about Barratt Developments, and we would prioritise taking a closer look at it.

Curious what other investors think of Barratt Developments? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.