Is Pets at Home Group Plc (LON:PETS) The Right Choice For A Smart Dividend Investor?

Could Pets at Home Group Plc (LON:PETS) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.

Investors might not know much about at Home Group’s dividend prospects, even though it has been paying dividends for the last five years and offers a 2.6% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. Remember though, due to the recent spike in its share price, at Home Group’s yield will look lower, even though the market may now be factoring in an improvement in its long-term prospects. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on at Home Group!

LSE:PETS Historical Dividend Yield, January 22nd 2020
LSE:PETS Historical Dividend Yield, January 22nd 2020

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Looking at the data, we can see that 75% of at Home Group’s profits were paid out as dividends in the last 12 months. It’s paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. at Home Group’s cash payout ratio in the last year was 33%, which suggests dividends were well covered by cash generated by the business. It’s positive to see that at Home Group’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

We update our data on at Home Group every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. at Home Group has been paying a dividend for the past five years. During the past five-year period, the first annual payment was UK£0.036 in 2015, compared to UK£0.075 last year. Dividends per share have grown at approximately 16% per year over this time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It’s not great to see that at Home Group’s have fallen at approximately 3.0% over the past five years. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. at Home Group’s payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. Earnings per share have been falling, and the company has a relatively short dividend history – shorter than we like, anyway. In sum, we find it hard to get excited about at Home Group from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.

Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from costs or inflation. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 9 analysts we track are forecasting for the future.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.