Many investors will be enticed by the prospect of a blue-chip stock like Burberry (LSE:BRBY) falling to 15-year lows and entering the FTSE 250. After all, the brand has existed for nearly 170 years, and it has undoubtedly faced troubled times before and recovered.
The stock has fallen 70% in just one year, and according to historical data such as that on the Hargreaves Lansdown platform, the stock apparently offers investors a whopping 10.25% dividend yield.
However, what has happened in the past has very little to do with the stock’s future performance, and this quoted dividend yield is very misleading. Instead, we need to look at the forecasts and evaluate whether Burberry really is worth buying.
Earnings forecast
Burberry’s earnings trajectory has been incredibly volatile. In its financial year 2022, the company registered earnings per share (EPS) of 123p. This slumped to 73p last year. And for the year ahead, that figure is expected to be just 13p.
This is a remarkable fall from grace for a company that outperformed many of its peers during the pandemic. One of the biggest pressure points has been China. In the year to 30 March, sales growth in the lucrative Asia-Pacific market turned negative.
However, looking further into the future, analysts see a recovery. EPS is expected to bounce back to 44p in 2025 and 53p in 2026. But what does this mean for the valuation metrics?
| 2024 | 2025 | 2026 | |
| EPS | 13p | 44p | 53p |
| Price-to-earnings | 44.6 | 13.7 | 11.3 |
While investing in a company that’s trading at 11.3 times forward earnings for 2026 might not sound bad, especially in the luxury sector, it’s all about what happens to earnings after that.
Unfortunately, there’s no consensus forecast beyond 2026. Personally, I’d be looking for low double-digit earnings growth. This would result in a price-to-earnings-to-growth (PEG) ratio under one — which indicates good value.
The dividend
I’ve never seen Burberry as a particularly attractive dividend stock, and that’s largely because it’s been trading at high earnings multiples and with a relatively low dividend payout.
However, with the stock dropping like a stone, Burberry suddenly looks like an interesting pick for dividend investors.
The only issue is that with earnings forecast to fall to just 13p this year, the dividend will be suspended. We already know this after a July announcement.
So, when investors see a 10.25% dividend yield on the Hargreaves Lansdown site, it’s very misleading. That’s the dividend from the last calendar year relative to the current share price.
This is why you see most American sites point to a forward yield which is calculated based on analysts’ projections.
So, here’s the forecasts for the dividend.
| 2024 | 2025 | 2026 | |
| Dividend payment | 0p | 35p | 41p |
| Dividend yield | 0% | 5.93% | 6.9% |
Personally, I think these forecasts could be a little optimistic as they point to a very high payout ratio, which could be unsustainable. Nevertheless, if the payments are anywhere near these figures, Burberry becomes a very viable dividend investment.
Keep a close eye on this one
Investing in Burberry today could be like trying to catch a falling knife. There’s no shortage of negative momentum. However, with the right strategy, Burberry could turn things around. It’s worth watching closely.
Sadly, I bought Burberry on a whim several months back. Only a very small holding, but a mistake in the short term, nonetheless.
