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The board of Hercules Site Services Plc (LON:HERC) has announced that it will pay a dividend of £0.006 per share on the 22nd of August. This means the dividend yield will be fairly typical at 4.2%.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Hercules Site Services' stock price has increased by 38% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.
See our latest analysis for Hercules Site Services
Hercules Site Services' Dividend Is Well Covered By Earnings
Unless the payments are sustainable, the dividend yield doesn't mean too much. Before making this announcement, Hercules Site Services' 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.
Looking forward, earnings per share is forecast to rise by 86.7% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 45%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Hercules Site Services' Dividend Has Lacked Consistency
Looking back, the dividend has been unstable but with a relatively short history, we think it may be a bit early to draw conclusions about long term dividend sustainability. Since 2022, the annual payment back then was £0.017, compared to the most recent full-year payment of £0.0172. Its dividends have grown at less than 1% per annum over this time frame. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Hercules Site Services' earnings per share has shrunk at 81% a year over the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
The Dividend Could Prove To Be Unreliable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. 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.