Yahoo Finance Should James Halstead plc (LON:JHD) Be Part Of Your Dividend Portfolio?
Today we'll take a closer look at James Halstead plc (LON:JHD) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
While James Halstead's 2.5% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple research can reduce the risk of buying James Halstead for its dividend - read on to learn more.
Explore this interactive chart for our latest analysis on James Halstead!
Payout ratios
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 77% of James Halstead's profits were paid out as dividends in the last 12 months. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. The company paid out 62% of its free cash flow, which is not bad per se, but does start to limit the amount of cash James Halstead has available to meet other needs. It's positive to see that James Halstead's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
While the above analysis focuses on dividends relative to a company's earnings, we do note James Halstead's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Remember, you can always get a snapshot of James Halstead's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of James Halstead's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was UK£0.054 in 2010, compared to UK£0.14 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.9% a year over that time.
Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Earnings have grown at around 3.6% a year for the past five years, which is better than seeing them shrink! James Halstead's earnings per share have barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.
Conclusion
To summarise, shareholders should always check that James Halstead's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think James Halstead is paying out an acceptable percentage of its cashflow and profit. Earnings per share growth has been slow, but we respect a company that maintains a relatively stable dividend. Ultimately, James Halstead comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.
You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in James Halstead stock.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
