SP Group A/S (CPH:SPG) is reducing its dividend to kr.3.00 on the 2nd of May. This payment takes the dividend yield to 0.8%, which only provides a modest boost to overall returns.
SP Group's Dividend Is Well Covered By Earnings
If it is predictable over a long period, even low dividend yields can be attractive. Based on the last payment, SP Group was paying only paying out a fraction of earnings, but the payment was a massive 115% of cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
Looking forward, earnings per share is forecast to rise by 26.8% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 19% by next year, which is in a pretty sustainable range.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2012, the first annual payment was kr.0.40, compared to the most recent full-year payment of kr.3.00. This implies that the company grew its distributions at a yearly rate of about 22% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
The Dividend Looks Likely To Grow
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. We are encouraged to see that SP Group has grown earnings per share at 15% per year over the past five years. SP Group definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.
Overall, it's not great to see that the dividend has been cut, but this might be explained by the payments being a bit high previously. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for SP Group that you should be aware of before investing. 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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