Service Stream's (ASX:SSM) Upcoming Dividend Will Be Larger Than Last Year's

Service Stream Limited (ASX:SSM) has announced that it will be increasing its dividend from last year's comparable payment on the 3rd of October to A$0.03. This takes the annual payment to 2.8% of the current stock price, which unfortunately is below what the industry is paying.

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Service Stream's Payment Could Potentially Have Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Based on the last payment, Service Stream was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

Looking forward, earnings per share is forecast to rise by 27.6% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 45% by next year, which is in a pretty sustainable range.

See our latest analysis for Service Stream

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2015, the dividend has gone from A$0.0107 total annually to A$0.06. This works out to be a compound annual growth rate (CAGR) of approximately 19% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Service Stream has seen earnings per share falling at 4.4% per year over the last five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. 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

In summary, while it's always good to see the dividend being raised, we don't think Service Stream's payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Service Stream 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. 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.