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Why It Might Not Make Sense To Buy Crest Nicholson Holdings plc (LON:CRST) For Its Upcoming Dividend

Simply Wall St

Crest Nicholson Holdings plc (LON:CRST) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 19th of March will not receive the dividend, which will be paid on the 9th of April.

Crest Nicholson Holdings's upcoming dividend is UK£0.22 a share, following on from the last 12 months, when the company distributed a total of UK£0.33 per share to shareholders. Based on the last year's worth of payments, Crest Nicholson Holdings has a trailing yield of 9.9% on the current stock price of £3.338. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Crest Nicholson Holdings

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year Crest Nicholson Holdings paid out 103% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Crest Nicholson Holdings generated enough free cash flow to afford its dividend. It paid out more than half (70%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Crest Nicholson Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

LSE:CRST Historical Dividend Yield, March 15th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. So we're not too excited that Crest Nicholson Holdings's earnings are down 3.9% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last six years, Crest Nicholson Holdings has lifted its dividend by approximately 31% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Crest Nicholson Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Has Crest Nicholson Holdings got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. What's more, Crest Nicholson Holdings is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Crest Nicholson Holdings and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 3 warning signs for Crest Nicholson Holdings that you should be aware of before investing in their shares.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.