The board of London Stock Exchange Group plc (LON:LSEG) has announced that the dividend on 20th of September will be increased to £0.317, which will be 27% higher than last year's payment of £0.25 which covered the same period. Despite this raise, the dividend yield of 1.1% is only a modest boost to shareholder returns.
London Stock Exchange Group's Dividend Is Well Covered By Earnings
If it is predictable over a long period, even low dividend yields can be attractive. Before making this announcement, London Stock Exchange Group's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 33%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.
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 £0.273 in 2012, and the most recent fiscal year payment was £0.95. This implies that the company grew its distributions at a yearly rate of about 13% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
London Stock Exchange Group May Have Challenges Growing The Dividend
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. London Stock Exchange Group has impressed us by growing EPS at 8.2% per year over the past five years. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.
Our Thoughts On London Stock Exchange Group's Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for London Stock Exchange Group that investors need to be conscious of moving forward. Is London Stock Exchange Group not quite the opportunity you were looking for? Why not check out our selection of top 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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