Should Income Investors Buy Schroders plc (LON:SDR) Before Its Upcoming Dividend? A Deep Dive into Dividend Sustainability and Earnings Resilience

For income-focused investors, the allure of a 5.4% dividend yield from Schroders plc (LON:SDR) is hard to ignore. With its upcoming ex-dividend date on 21 August 2025 and a payout of 6.5 pence per share, the asset manager has long been a staple for those seeking regular returns. But in a shrinking profit environment, the critical question remains: Is this yield sustainable, or is it a red flag?

A History of Dividend Consistency

Schroders has maintained a disciplined dividend policy for years, paying both interim and final dividends with clockwork regularity. For instance, the 2024 interim dividend of 6.5 pence per share and final dividend of 15 pence per share mirrored payouts in 2023, while 2022 saw a significant jump in both payments. This consistency has made the stock a favorite among income investors, particularly those who value predictability.

However, the company's dividend payout ratio—a key metric for sustainability—has become a point of concern. In 2025, the payout ratio is expected to reach 95%, meaning nearly all of Schroders' earnings are being distributed to shareholders. While the cash payout ratio (29.8%) suggests the dividend is well-covered by cash flows, the earnings-based ratio implies limited room for reinvestment or unexpected shocks.

Earnings Resilience Amid Restructuring Costs

Schroders' earnings story is a mixed bag. For the first half of 2025, adjusted operating profit rose 7% to £316 million, driven by a 2% increase in net operating revenue and cost discipline. Yet, profit before tax fell 29% due to £45 million in transformation costs and restructuring charges. These non-cash expenses, while temporarily painful, are part of a broader strategy to reduce the adjusted cost-to-income ratio from 74% to below 70% by 2027.

The company has already achieved £21 million in cost savings in H1 2025, contributing to a £50 million target for the year. These savings are part of a £150 million annualized cost reduction goal by 2027, signaling a commitment to operational efficiency. Meanwhile, gross sales hit £68 billion in H1 2025, up 8% year-on-year, and positive net flows in global equities and ESG mandates highlight growing client confidence.

The Sustainability Tightrope

Despite these positives, Schroders faces a shrinking earnings base. Over the past five years, earnings per share (EPS) have declined at a 2.6% annual rate, while the dividend has grown at 8.1% annually. This disconnect raises questions about long-term sustainability. Analysts project a 40.2% EPS increase in 2026, which could bring the payout ratio to a more manageable 61% if the dividend remains stable. However, this hinges on the success of cost-cutting and revenue growth initiatives.

The Board has signaled its intent to reduce the payout ratio to 50% over time, balancing shareholder returns with reinvestment. This strategic pivot is crucial, as a 95% payout ratio leaves little buffer for earnings volatility. For now, the cash flow coverage (29.8%) provides a safety net, but investors must monitor whether earnings growth materializes as forecast.

Strategic Moves and Market Position

Schroders is betting on private markets and wealth management to drive future growth. Its Life-Time Annual Fund (LTAF) business and ESG strategies are central to this plan, leveraging its integrated approach to client needs. Assets under management (AUM) reached £778.7 billion in 2024, up 3.7% year-on-year, despite net outflows in some segments. This resilience underscores the company's ability to adapt to market shifts.

Investment Considerations

For income investors, the key trade-off is high yield versus earnings uncertainty. The 5.4% yield is attractive, but it comes with risks:
1. High Payout Ratio: A 95% earnings payout ratio is unsustainable in the long term without earnings growth.
2. Earnings Volatility: Restructuring costs and currency headwinds could pressure profits in the near term.
3. Strategic Execution: Success in cost savings and growth areas like ESG will determine whether the dividend remains secure.

Buyers should consider:
- Timing: Purchasing before the 21 August ex-dividend date locks in the 6.5p payout, but the stock may trade at a premium near this date.
- Diversification: Schroders' exposure to global markets and ESG trends offers diversification benefits but also introduces macroeconomic risks.
- Long-Term Outlook: If the company meets its cost savings and earnings growth targets, the dividend could stabilize. However, a prolonged earnings slump could force a cut.

Final Verdict

Schroders plc remains a compelling option for income investors who are willing to tolerate short-term volatility for a high yield. The company's strong cash flow, disciplined cost management, and strategic focus on growth areas like ESG provide a foundation for sustainability. However, the high payout ratio and recent EPS declines mean investors should approach with caution. Those who believe in the success of Schroders' transformation program and its ability to grow earnings in 2026 may find the current yield an attractive entry point.

As always, diversification and a clear understanding of risk are paramount. For those who can stomach the uncertainty, Schroders offers a blend of income and growth potential—but not without its challenges.