The board of Alpha Financial Markets Consulting plc (LON:AFM) has announced that it will be increasing its dividend on the 20th of September to UK£0.075. This will take the dividend yield from 2.6% to 2.6%, providing a nice boost to shareholder returns.

Check out our latest analysis for Alpha Financial Markets Consulting

Alpha Financial Markets Consulting's Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Alpha Financial Markets Consulting's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Over the next year, EPS is forecast to expand by 143.6%. If the dividend continues along recent trends, we estimate the payout ratio will be 64%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Alpha Financial Markets Consulting's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. The dividend has gone from UK£0.03 in 2017 to the most recent annual payment of UK£0.10. This implies that the company grew its distributions at a yearly rate of about 29% over that duration. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

Dividend Growth Could Be Constrained

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. We are encouraged to see that Alpha Financial Markets Consulting has grown earnings per share at 30% per year over the past five years. EPS has been growing well, but Alpha Financial Markets Consulting has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Alpha Financial Markets Consulting that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.