Does Marks & Spencer’s dividend forecast look tempting?

Girl shopping in the supermarket with her father.

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Struggling to stay on trend and leave some loyal buyers unsatisfied. Not only the retailer has described that Marks & Spencer (LSE: MKS) but also the share price of recent years.

But with the company trading well lately, shares are up more than 80% over the past year. This means that they are still 27% below the level of five years ago.

But historically, one of the attractive sides of Marks & Sparks holdings has been its dividend. How does the current dividend forecast appeal to me?

Persistent pain

Currently, the company does not pay a dividend. The last it paid was in 2020. That was only half of the same payout a year earlier. Dividends were subsequently cut entirely and have since been cancelled.

In fact, I think Marks & Spencer stocks are a good example of why diversification as an investor is an important risk management tool.

Five years ago, I would have expected M&S to continue paying its long-standing dividend. Had I invested on that basis without balancing my portfolio, it could have been a very costly mistake. I would now receive no dividend income and own stock worth less than what I paid for it.

Forward focus

But as the phrase “dividend forecast” suggests, no one ever knows for sure what will happen to it in the future. Past performance is not necessarily an indicator of what will happen in the future when it comes to dividends.

As part of its final results in May, the company announced a plan to “to recover [the] dividendin the current fiscal year, which runs until the end of April next year.

What does that mean? Does the ‘recovery’ of dividends mean that they will be returned to the level at which they were suspended? Or could it simply mean that a dividend of any size is coming back?

My interpretation would be the first. However, the company said it plans to “a modest annual dividend”. That is expected to start with the interim results, which will be announced in November.

Modest dividend

What could such a ‘modest’ dividend look like? Last year earnings per share were 18.5p. That would be enough to bring back the pre-pandemic dividend, which was on track to be just under 7 pence per share before the cut.

However, I am skeptical that a ‘modest’ restoration would immediately return the dividend to its previous level. I rather expect a full year dividend of 4-6p. That would suggest an expected dividend yield of less than 3%.

Over time, the payout could of course be significantly higher than this dividend forecast, if company performance was strong enough to support it.

But for now I can’t tempt myself with that expected return, since many blue chip companies generate two to three times as much return.

I’m also still not convinced about the long-term growth prospects for Marks & Spencer. The company has done a good job modernizing its offerings and increasing its food store footprint.

The trusted brand is an asset. But the country operates in a brutally competitive market, as recent history has repeatedly shown. I have no plans to buy the stocks for my portfolio.

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