Bodycote plc (LON:BOY): A Dividend Gem, But Proceed with Caution

Investors often chase high-yield stocks like Bodycote plc (LON:BOY) around ex-dividend dates, drawn by the allure of steady income. With an upcoming ex-dividend date on April 24, 2025, and a dividend yield of 5.0%, the stock might seem like a no-brainer. But before diving in, investors must weigh the dividend’s reliability against broader risks lurking beneath the surface.

The Dividend Case for Bodycote: A Long History, But Slowing Growth

Bodycote has a storied reputation for dividend discipline. The company has increased or maintained its dividend for over 30 years, with a CADI (Consecutive Annual Dividend Increases) score of 10+ years, signaling financial resilience. The next dividend payment of 16.1p per share (due June 5, 2025) brings the annual dividend to 23.0p, supporting its current 5.0% yield.

However, the dividend’s recent growth has slowed. From 2023’s 22.7p to 2024’s 23.0p, the increase was a modest 1.3%, a stark contrast to earlier years like 2017 (+10.1%) and 2018 (+9.2%). This deceleration raises questions about the sustainability of future hikes.

Why the Yield Might Be Misleading

While a 5.0% yield is enticing, it’s crucial to consider why it’s so high. Dividend yields rise when share prices fall. Bodycote’s stock closed at £4.79 on April 17, 2025, down significantly from its 52-week high. The 52-week yield high of 8.4% (April 12, 2025) suggests the market has been pricing in risks, such as weaker earnings or sector-specific headwinds.

A closer look at the dividend payout ratio (33.06%) and dividend cover (2.8) indicates financial stability—earnings comfortably support the payout. But these metrics depend on sustained profitability. If Bodycote’s earnings decline, even a low payout ratio could strain future dividends.

The Ex-Dividend Date Trap: More Than Just Timing

Investors must remember that buying shares before April 24, 2025, only secures the upcoming dividend. The stock’s post-ex price typically drops to reflect the payout, so timing must align with long-term goals. Moreover, the yield’s volatility—swinging from 3.0% to 8.4% in 52 weeks— highlights how share price fluctuations can erase dividend gains.

Special Dividends and Hidden Risks

Bodycote’s history includes special dividends, such as 25p in 2018 and 20p in 2019, which are excluded from standard yield calculations. While these one-off payouts boost returns temporarily, they may signal inconsistent earnings growth or capital management strategies. Investors chasing yields should focus on regular dividends, not one-time bonuses.

The Bottom Line: A Solid Dividend, but Not Without Risks

Bodycote’s dividend is reliable and sustainable, underpinned by a strong payout ratio and decades of consistency. However, investors must ask:

1. Is the high yield a warning sign? The 5.0% yield may reflect a discounted share price due to slowing growth or sector-specific challenges.
2. Can the dividend keep growing? With recent hikes stagnating, future increases hinge on earnings resilience in a potentially sluggish market.
3. What’s the total return picture? Chasing yield alone ignores capital risk. A falling share price could negate dividend gains.

Final Analysis: Proceed with Prudence

Bodycote is a high-quality dividend stock worth considering for income-focused portfolios. Its 30+ years of dividend growth and conservative payout ratio (33%) suggest stability. However, investors must not mistake yield for value. The 5.4% projected yield over three years, if driven by further share price declines, could signal deteriorating fundamentals.

The verdict? Bodycote is a hold for existing shareholders but not a “buy at any cost” for new investors. Pair the dividend allure with a deep dive into its core business: Is its thermal processing sector thriving? Are margins holding up? Only then can investors determine whether the dividend’s safety outweighs the risks.

In short, Bodycote’s ex-dividend date is a milestone, not a mandate. Proceed with caution, and let fundamentals—not just yield—guide your decision.