Yahoo Finance Is QinetiQ Group plc (LON:QQ.) A Smart Choice For Dividend Investors?
Dividend paying stocks like QinetiQ Group plc (LON:QQ.) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.
A 1.9% yield is nothing to get excited about, but investors probably think the long payment history suggests QinetiQ Group has some staying power. Some simple analysis can reduce the risk of holding QinetiQ Group for its dividend, and we'll focus on the most important aspects below.
Explore this interactive chart for our latest analysis on QinetiQ Group!
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 30% of QinetiQ Group's profits were paid out as dividends in the last 12 months. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. QinetiQ Group paid out 70% of its cash flow as dividends last year, which is within a reasonable range for the average corporation. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
While the above analysis focuses on dividends relative to a company's earnings, we do note QinetiQ Group's strong net cash position, which will let it pay larger dividends for a time, should it choose.
Consider getting our latest analysis on QinetiQ Group's financial position here.
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. QinetiQ Group has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past ten-year period, the first annual payment was UK£0.048 in 2010, compared to UK£0.066 last year. Dividends per share have grown at approximately 3.3% per year over this time. QinetiQ Group's dividend payments have fluctuated, so it hasn't grown 3.3% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? It's good to see QinetiQ Group has been growing its earnings per share at 16% a year over the past five years. A company paying out less than a quarter of its earnings as dividends, and growing earnings at more than 10% per annum, looks to be right in the cusp of its growth phase. At the right price, we might be interested.
Conclusion
To summarise, shareholders should always check that QinetiQ Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that QinetiQ Group pays out a low fraction of earnings. It pays out a higher percentage of its cashflow, although this is within acceptable bounds. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. QinetiQ Group has a number of positive attributes, but it falls slightly short of our (admittedly high) standards. Were there evidence of a strong moat or an attractive valuation, it could still be well worth a look.
Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 8 analysts we track are forecasting for QinetiQ Group for free with public analyst estimates for the company.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 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.
