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Service Stream Limited (ASX:SSM) will increase its dividend from last year's comparable payment on the 4th of October to A$0.025. This makes the dividend yield about the same as the industry average at 3.4%.
Check out our latest analysis for Service Stream
Service Stream's Dividend Is Well Covered By Earnings
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Before this announcement, Service Stream was paying out 86% of earnings, but a comparatively small 35% of free cash flows. This leaves plenty of cash for reinvestment into the business.
The next year is set to see EPS grow by 101.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 44%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2014, the dividend has gone from A$0.0107 total annually to A$0.05. This means that it has been growing its distributions at 17% per annum over that time. 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.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Earnings per share has been sinking by 17% over the last 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. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
Our Thoughts On Service Stream's Dividend
Overall, we always like to see the dividend being raised, but we don't think Service Stream will make a great income stock. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. Overall, we don't think this company has the makings of a good income stock.
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. For example, we've picked out 1 warning sign for Service Stream that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.