Hill & Smith Holdings PLC's (LON:HILS) dividend will be increasing from last year's payment of the same period to £0.13 on 6th of January. Even though the dividend went up, the yield is still quite low at only 2.6%.
Hill & Smith Holdings' Earnings Easily Cover The Distributions
The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Prior to this announcement, Hill & Smith Holdings' dividend was only 52% of earnings, however it was paying out 112% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.
Over the next year, EPS is forecast to expand by 33.7%. Assuming the dividend continues along recent trends, we think the payout ratio could be 40% by next year, which is in a pretty sustainable range.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was £0.132 in 2012, and the most recent fiscal year payment was £0.32. This works out to be a compound annual growth rate (CAGR) of approximately 9.3% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Hill & Smith Holdings might have put its house in order since then, but we remain cautious.
Hill & Smith Holdings May Find It Hard To Grow The Dividend
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Hill & Smith Holdings hasn't seen much change in its earnings per share over the last five years. Growth of 1.0% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. This isn't bad in itself, but unless earnings growth pick up we wouldn't expect dividends to grow either.
Overall, we always like to see the dividend being raised, but we don't think Hill & Smith Holdings will make a great income stock. While Hill & Smith Holdings is earning enough to cover the payments, the cash flows are lacking. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Hill & Smith Holdings that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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