The board of SThree plc (LON:STEM) has announced that it will be increasing its dividend on the 10th of June to UK£0.08. This will take the dividend yield from 3.1% to 3.1%, providing a nice boost to shareholder returns.
SThree's Earnings Easily Cover the Distributions
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, SThree was easily earning enough to cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.
Looking forward, earnings per share is forecast to rise by 6.2% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 29% by next year, which is in a pretty sustainable range.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The dividend has gone from UK£0.14 in 2012 to the most recent annual payment of UK£0.11. This works out to be a decline of approximately 2.4% per year over that time. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
SThree 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. SThree has seen EPS rising for the last five years, at 8.4% per annum. SThree definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.
We Really Like SThree's Dividend
Overall, a dividend increase is always good, and we think that SThree is a strong income stock thanks to its track record and growing earnings. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All of these factors considered, we think this has solid potential as a dividend stock.
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. Taking the debate a bit further, we've identified 2 warning signs for SThree 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.