Yahoo Finance Is Strix Group Plc's (LON:KETL) 5.9% Dividend Worth Your Time?
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Dividend paying stocks like Strix Group Plc (LON:KETL) 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.
Strix Group pays a 5.9% dividend yield, and has been paying dividends for the past two years. It's certainly an attractive yield, but readers are likely curious about its staying power. The company also bought back stock equivalent to around 1.6% of market capitalisation this year. There are a few simple ways to reduce the risks of buying Strix Group for its dividend, and we'll go through these below.
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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 57% of Strix Group's profits were paid out as dividends in the last 12 months. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Of the free cash flow it generated last year, Strix Group paid out 29% as dividends, suggesting the dividend is affordable. 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.
Remember, you can always get a snapshot of Strix Group's latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past two-year period, the first annual payment was UK£0.07 in 2017, compared to UK£0.094 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time.
Strix Group has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.
Dividend Growth Potential
The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Strix Group's earnings per share are down -5.9% over the past year. That's not great to see, but there could be a number of reasons for this. Should the decline continue, we would become concerned. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.
Conclusion
To summarise, shareholders should always check that Strix Group'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 Strix Group has an acceptable payout ratio and its dividend is well covered by cashflow. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. In sum, we find it hard to get excited about Strix Group from a dividend perspective. It's not that we think it's a bad business; just that there are other companies that perform better on these criteria.
Given that earnings are not growing, the dividend does not look nearly so attractive. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 4 analysts we track are forecasting for the future.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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. Thank you for reading.