Samuel Heath & Sons plc's (LON:HSM) dividend is being reduced by 18% to £0.045 per share on 22nd of March, in comparison to last year's comparable payment of £0.055. However, the dividend yield of 4.0% still remains in a typical range for the industry.
See our latest analysis for Samuel Heath & Sons
Samuel Heath & Sons' Dividend Is Well Covered By Earnings
Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, Samuel Heath & Sons' earnings easily covered the dividend, but free cash flows were negative. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
If the trend of the last few years continues, EPS will grow by 3.0% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 34%, which is in the range that makes us comfortable with the sustainability of the dividend.
Dividend Volatility
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2013, the annual payment back then was £0.118, compared to the most recent full-year payment of £0.131. This implies that the company grew its distributions at a yearly rate of about 1.1% over that duration. It's encouraging 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, which makes this less attractive as an income investment.
The Dividend's Growth Prospects Are Limited
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings have grown at around 3.0% a year for the past five years, which isn't massive but still better than seeing them shrink. While EPS growth is quite low, Samuel Heath & Sons has the option to increase the payout ratio to return more cash to shareholders.
Our Thoughts On Samuel Heath & Sons' Dividend
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Samuel Heath & Sons is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 4 warning signs for Samuel Heath & Sons (of which 1 is a bit concerning!) you should know about. Is Samuel Heath & Sons not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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