Could Harvey Norman dividends be at risk after profits halve?

Could Harvey Norman investors be facing another dividend cut?

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It's been a happy day for most ASX 200 shares on the stock markets so far this Friday. At the time of writing, the S&P/ASX 200 Index (ASX: XJO) has gained a tentative 0.29%, pulling the ASX 200 back over 6,830 points. But let's talk about the Harvey Norman Holdings Limited (ASX: HVN) share price because we've just had some news that might affect Harvey Norman's dividend investors.

We got some big ASX news out of Harvey Norman this morning, which is clearly having an impact on the performance of the ASX 200 retail giant's shares today. While the ASX 200 is in the green so far this Friday, the Harvey Norman share price briefly went in the other direction this morning.

At present, the company has bounced back and is currently up a rosy 2.25% at $3.63 a share. But just after market open this morning, the company rapidly tumbled all the way down to $3.44 a share (down more than 3% at the time) before rebounding to the current levels we are seeing.

It's perhaps no wonder investors were a little skittish on this company's shares in the early trading hours today. As we went over this morning, Harvey Norman has just given investors a dual announcement.

ASX 200 retail share to buy back 10% of its stock

First, the company released a trading update, covering the three months to 30 September. This revealed that Harvey Norman has suffered a 9.1% slide in aggregate sales over the first quarter of FY2024 compared to the prior corresponding period across all of its brands.

That led to an indicated profit before tax of $86.23 million, which is a 49.1% drop compared to the prior corresponding period. So that's obviously not great news for investors.

However, Harvey Norman also announced that it would be commencing a ~$442 million share buyback program going forward. This program will aim to buy back upwards of 10% of Harvey Norman's total share count. So this is arguably why investors are now pushing up Harvey Norman shares enthusiastically.

But let's talk about what this might mean for ASX dividend investors. Many income investors may have been attracted to Harvey Norman shares over the past year or two. That's thanks to the monstrous dividend yield on display.

Even after today's healthy share price boost, the Harvey Norman trailing dividend yield is now sitting at a fully franked 6.9% (or 9.84% grossed-up).

However, investors might be right to be a little concerned about this fat dividend yield's future prospects, given what Harvey Norman has just revealed.

Are Harvey Norman's dividends sustainable?

At the end of the day, dividends have to be funded out of a company's profits. And if Harvey Norman's quarterly profit just collapsed by almost 50%, it doesn't exactly inspire confidence that this company will be able to keep paying out dividends at even the levels it has been over the past 12 months.

We saw this exact scenario playing out when the company reported its full-year earnings for FY2023 back in August. As we discussed at the time, Harvey Norman revealed that its FY2023 profits before tax slumped 27.8% down to $680.2 million.

This was almost certainly behind the company's revelation that its dividends for the 2023 financial year would take a 33% haircut down to 25 cents per share. In the previous financial year, investors enjoyed a total of 37.5 cents per share in dividends.

So a near-50% drop in profits for the September quarter compared to the prior quarter doesn't exactly inspire confidence for income investors. Adding to that uncertainty will be Harvey Norman management's comments regarding its share buyback program today:

The Board of HVN believes that the buyback is an appropriate capital management strategy, particularly having regard to recent share price history. The Board will continue to monitor and assess opportunities for growth and retain financial flexibility in order to execute strategy.

The more Harvey Norman spends on buying back its own shares, the less it will have in cash to pay out as dividends. So I'd be a little worried today if I had bought Harvey Norman shares for their dividend income potential.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Harvey Norman. The Motley Fool Australia has positions in and has recommended Harvey Norman. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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