At 195p, Taylor Wimpey(LSE: TW) shares are on a forward P/E of only around 10, based on forecasts for this year and next which indicate continuing earnings growth. That would seem cheap to me even for an average yielding stock, but analysts are expecting a whopping 7% dividend this year, rising to 7.5% next year, so why such a low rating?
It could be partly down to Taylor Wimpey's dividend strategy, of paying relatively modest ordinary dividends and topping them up with larger special ones. In 2016, the firm's ordinary dividend of 2.82p per share would yield only around 1.4% at today's share price, although that was significantly ahead of the 1.67p offered in 2015.
But it was topped up to a total of 10.91p per share with special dividends, for a total yield of 5.6% (again at today's price). And for 2017, the company has already announced its plan to pay about 4.6p in ordinary dividends, plus 9.2p in specials, amounting to a total of 13.8p -- for that yield of 7%.
Taylor Wimpey says its strategy is targeted at the cyclical nature of the housing business, and it wants to offer an ordinary dividend that is reliable through downturns, plus extra returns in the form of those special dividends during the good times. So we should see 2017's ordinary 4.6p (2.3%) as a minimum that we'll get during the next down cycle, with considerably more expected on top of that -- and I really can't see an ordinary-only year coming up any time soon.
I like that strategy, and it further convinces me that Taylor Wimpey is a great long-term dividend investment.
A timely bargain?
Shares in Centrica(LSE: CNA) have slumped since late 2013, to 218p, as earnings have fallen. But that's pushed forecast dividend yields up to 5.7% for this year and 5.9% next, the highest they've been for a long time.
There are good reasons why many investors are shunning Centrica, the owner of British Gas, and one is that it cut its dividend in 2013 and again in 2014. There are fears that a further cut might be needed in future -- even though the City is predicting slight rises this year and next. Competition is fierce, and British Gas has extended its retail price freeze through to August.
Debt has also been a problem, though the net figure was reduced by 27% to under £3.5bn in 2016. But that has put a squeeze on capital expenditure, which is now set to be capped at £1bn in 2017. And though the firm expects 2017 operating cash flow to exceed £2bn, it does make some investors nervous about the long-term reliability of the cash flow needed to keep paying those dividends.
Still too cheap
I can understand that, but I reckon the current share price has already factored-in that risk, and then some. With a return to earnings growth on the cards for 2018, we should see the shares dropping to a P/E multiple of around 12, and I see that as exceptionally low for a reliable dividend stock.
Will there be a future dividend cut? Maybe. But I think a big cut is unlikely, and even with a yield as low as, say, 4%, I'd still see today's share price as attractive long-term value. April could turn out to be a very good time to buy and secure a tasty income stream.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. 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.