Alumasc Group's (LON:ALU) Shareholders Will Receive A Bigger Dividend Than Last Year

The Alumasc Group plc (LON:ALU) will increase its dividend on the 6th of April to £0.034, which is 1.5% higher than last year's payment from the same period of £0.0335. This makes the dividend yield 6.3%, which is above the industry average.

View our latest analysis for Alumasc Group

Alumasc Group's Payment Has Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. However, prior to this announcement, Alumasc Group was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The business is returning a large chunk of its cash to shareholders, which means it is not being used to grow the business.

Looking forward, earnings per share is forecast to fall by 0.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could be 41%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2013, the annual payment back then was £0.02, compared to the most recent full-year payment of £0.10. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. 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 Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Alumasc Group has impressed us by growing EPS at 8.6% per year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Alumasc Group's prospects of growing its dividend payments in the future.

Our Thoughts On Alumasc Group's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Alumasc Group's payments are rock solid. While Alumasc Group is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Taking the debate a bit further, we've identified 2 warning signs for Alumasc Group that investors need to be conscious of moving forward. 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.