GR Engineering Services (ASX:GNG) Is Increasing Its Dividend To AU$0.09

GR Engineering Services Limited's (ASX:GNG) dividend will be increasing to AU$0.09 on 25th of March. This makes the dividend yield about the same as the industry average at 7.9%.

View our latest analysis for GR Engineering Services

GR Engineering Services Doesn't Earn Enough To Cover Its Payments

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, GR Engineering Services' dividend made up quite a large proportion of earnings but only 42% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

EPS is set to fall by 6.6% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could reach 96%, which could put the dividend in jeopardy if the company's earnings don't improve.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2012, the first annual payment was AU$0.08, compared to the most recent full-year payment of AU$0.18. This works out to be a compound annual growth rate (CAGR) of approximately 8.4% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

GR Engineering Services Could Grow Its Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. GR Engineering Services has impressed us by growing EPS at 8.6% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.

Our Thoughts On GR Engineering Services' Dividend

In summary, while it's always good to see the dividend being raised, we don't think GR Engineering Services' payments are rock solid. 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. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for GR Engineering Services (of which 1 makes us a bit uncomfortable!) you should know about. Is GR Engineering Services not quite the opportunity you were looking for? Why not check out our selection of top 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.