Is Begbies Traynor Group plc (LON:BEG) At Risk Of Cutting Its Dividend?

Is Begbies Traynor Group plc (LON:BEG) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

One way to look into the risks is to look at a snapshot of Begbies Traynor Group’s latest financial position, by checking our visualisation of its financial health.

With Begbies Traynor Group yielding 3.1% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. Some simple research can reduce the risk of buying Begbies Traynor Group for its dividend – read on to learn more.

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AIM:BEG Historical Dividend Yield, October 20th 2019
AIM:BEG Historical Dividend Yield, October 20th 2019

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. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Begbies Traynor Group paid out 120% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

We also measure dividends paid against a company’s levered free cash flow, to see if enough cash was generated to cover the dividend. Begbies Traynor Group’s cash payout ratio in the last year was 42%, which suggests dividends were well covered by cash generated by the business. It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Begbies Traynor Group fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Is Begbies Traynor Group’s Balance Sheet Risky?

As Begbies Traynor Group’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A rough way to check this is with these two simple ratios: a) net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and b) net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). Begbies Traynor Group has net debt of 0.86 times its EBITDA, which we think is not too troublesome.

We calculated its interest cover by measuring its earnings before interest and tax (EBIT), and dividing this by the company’s net interest expense. Begbies Traynor Group has EBIT of 8.26 times its interest expense, which we think is adequate.

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. Begbies Traynor Group has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. Its most recent annual dividend was UK£0.026 per share, effectively flat on its first payment ten years ago.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company’s earnings are not consistent.

Dividend Growth Potential

With a relatively unstable dividend, it’s even more important to evaluate if earnings per share (EPS) are growing – it’s not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Over the past five years, it looks as though Begbies Traynor Group’s EPS have declined at around 10% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that Begbies Traynor Group’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re not keen on the fact that Begbies Traynor Group paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and Begbies Traynor Group’s dividend has been cut at least once in the past, which is disappointing. In summary, Begbies Traynor Group has a number of shortcomings that we’d find it hard to get past. Things could change, but we think there are a number of better ideas out there.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Begbies Traynor Group stock.

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

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.

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. Thank you for reading.