The board of Smart Metering Systems plc (LON:SMS) has announced that the dividend on 26th of October will be increased to £0.0832, which will be 10% higher than last year's payment of £0.0756 which covered the same period. This makes the dividend yield 4.8%, which is above the industry average.
See our latest analysis for Smart Metering Systems
Smart Metering Systems Is Paying Out More Than It Is Earning
A big dividend yield for a few years doesn't mean much if it can't be sustained. Before this announcement, Smart Metering Systems was paying out 250% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
Over the next year, EPS is forecast to expand by 46.1%. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio getting very high over the next year.
Smart Metering Systems Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2013, the dividend has gone from £0.023 total annually to £0.303. This works out to be a compound annual growth rate (CAGR) of approximately 29% a year over that time. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
Dividend Growth May Be Hard To Achieve
The company's investors will be pleased to have been receiving dividend income for some time. Let's not jump to conclusions as things might not be as good as they appear on the surface. It's not great to see that Smart Metering Systems' earnings per share has fallen at approximately 4.2% per year over the past five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.
Smart Metering Systems' Dividend Doesn't Look Sustainable
In summary, while it's always good to see the dividend being raised, we don't think Smart Metering Systems' payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. Overall, we don't think this company has the makings of a good income stock.