BlueScope Steel Limited’s (ASX:BSL) dividend is being reduced from last year’s payment covering the same period to A$0.25 on the 12th of October. This means that the annual payment is 3.0% of the current stock price, which is lower than what the rest of the industry is paying.
BlueScope Steel’s Dividend Is Well Covered By Earnings
Even a low dividend yield can be attractive if it is sustained for years on end. However, BlueScope Steel’s earnings easily cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.
Looking forward, earnings per share is forecast to fall by 67.5% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 33%, which we are pretty comfortable with and we think is feasible on an earnings basis.
BlueScope Steel’s Dividend Has Lacked Consistency
Looking back, BlueScope Steel’s dividend hasn’t been particularly consistent. This suggests that the dividend might not be the most reliable. The annual payment during the last 8 years was A$0.06 in 2014, and the most recent fiscal year payment was A$0.50. This implies that the company grew its distributions at a yearly rate of about 30% over that duration. BlueScope Steel has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
The Dividend Looks Likely To Grow
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It’s encouraging to see that BlueScope Steel has been growing its earnings per share at 37% a year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.
BlueScope Steel Looks Like A Great Dividend Stock
It is generally not great to see the dividend being cut, but we don’t think this should happen much if at all in the future given that BlueScope Steel has the makings of a solid income stock moving forward. By reducing the dividend, pressure will be taken off the balance sheet, which could help the dividend to be consistent in the future. All in all, this checks a lot of the boxes we look for when choosing an income stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We’ve spotted 2 warning signs for BlueScope Steel (of which 1 can’t be ignored!) you should know about. Is BlueScope Steel not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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