The advice of UBM Development SA (VIE:UBS) announced that it would increase its dividend on May 23 to €2.25. This will raise the dividend yield from 5.4% to 5.4%, giving shareholder returns a nice boost.
Discover our latest analysis for UBM Development
UBM Development revenue easily covers distributions
We like to see strong dividend yields, but that doesn’t matter if the payout isn’t sustainable. Prior to making the announcement, UBM Development was earning enough to cover the dividend, but generating no free cash flow. The absence of cash flow could definitely make it difficult to return cash to shareholders, or at least mean that the balance sheet will be under pressure.
Looking ahead, earnings per share are expected to grow 14.3% over the next year. If the dividend continues on this path, the payout ratio could be 47% by next year, which we believe can be quite sustainable in the future.
UBM’s development has a solid track record
The company has been paying a dividend for a long time and it is quite stable, which gives us confidence in the future dividend potential. The first annual payment in the past 10 years was €0.55 in 2012, and the last payment in the fiscal year was €2.25. This equates to a compound annual growth rate (CAGR) of approximately 15% per year during this period. The rapid growth of dividends over a long period is a very valuable characteristic of an income stock.
UBM development may struggle to grow dividend
Investors in the company will be happy to have received dividend income for a while. Revenues have grown about 2.9% per year over the past five years, which isn’t huge, but it’s still better than seeing them decline. Growth of 2.9% may indicate that the company has limited investment opportunities, so it is instead returning its profits to shareholders. While not necessarily negative, it is a clear indication that dividend growth may be limited going forward unless earnings begin to pick up again.
Our opinion on the UBM Development dividend
Overall, it’s probably not a great income stock, even though the dividend is being increased right now. Although the low payout ratio is a redeeming feature, this is offset by the minimum cash to cover payouts. We don’t think UBM Development is a great stock to add to your portfolio if income is your priority.
Market movements testify to the valuation of a consistent dividend policy over a more unpredictable one. At the same time, there are other factors that our readers should be aware of before investing capital in a stock. For example, we have identified 3 warning signs for UBM Development (1 is potentially serious!) that you should be aware of before investing. Looking for more high yield dividend ideas? Try our collection of strong dividend payers.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.