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The board of Smiths Group plc (LON:SMIN) has announced that it will be paying its dividend of £0.273 on the 18th of November, an increased payment from last year's comparable dividend. Despite this raise, the dividend yield of 2.6% is only a modest boost to shareholder returns.
Check out our latest analysis for Smiths Group
Smiths Group Doesn't Earn Enough To Cover Its Payments
Even a low dividend yield can be attractive if it is sustained for years on end. Before making this announcement, Smiths Group'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.
Earnings per share is forecast to rise exponentially over the next year. If recent patterns in the dividend continues, we would start to get a bit worried, with the payout ratio possibly reaching 234%.
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of £0.363 in 2012 to the most recent total annual payment of £0.396. Dividend payments have been growing, but very slowly over the period. 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 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. Over the past five years, it looks as though Smiths Group's EPS has declined at around 54% a year. 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 always like to see the dividend being raised, but we don't think Smiths Group will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We don't think Smiths Group is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 3 warning signs for Smiths Group that you should be aware of before investing. Is Smiths Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.