Begbies Traynor Group plc (LON:BEG) is about to trade ex-dividend in the next three days. Investors can purchase shares before the 8th of October in order to be eligible for this dividend, which will be paid on the 5th of November.
Begbies Traynor Group's next dividend payment will be UK£0.019 per share. Last year, in total, the company distributed UK£0.028 to shareholders. Looking at the last 12 months of distributions, Begbies Traynor Group has a trailing yield of approximately 3.2% on its current stock price of £0.88. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Begbies Traynor Group paid out 378% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out an unsustainably high 367% of its free cash flow as dividends over the past 12 months, which is worrying. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
As Begbies Traynor Group's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Begbies Traynor Group's earnings have been skyrocketing, up 57% per annum for the past five years. Although earnings per share are growing quickly, the size of the company's payout ratio - more than twice its earnings - suggests there may be something else at work here. We'd suggest looking into this further before considering a purchase.
Begbies Traynor Group also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Begbies Traynor Group has seen its dividend decline 1.0% per annum on average over the past 10 years, which is not great to see.
The Bottom Line
Is Begbies Traynor Group an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. Bottom line: Begbies Traynor Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Begbies Traynor Group. Every company has risks, and we've spotted 2 warning signs for Begbies Traynor Group you should know about.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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