Read This Before Buying Orchard Funding Group plc (LON:ORCH) For Its Dividend

Could Orchard Funding Group plc (LON:ORCH) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, Orchard Funding Group likely looks attractive to dividend investors, given its 5.2% dividend yield and five-year payment history. It sure looks interesting on these metrics - but there's always more to the story. Some simple analysis can reduce the risk of holding Orchard Funding Group for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Orchard Funding Group!

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, Orchard Funding Group paid out 50% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

We update our data on Orchard Funding Group every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Orchard Funding Group has been paying a dividend for the past five years. During the past five-year period, the first annual payment was UK£0.03 in 2016, compared to UK£0.03 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.3% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

It's good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We're not that enthused by this.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? In the last five years, Orchard Funding Group's earnings per share have shrunk at approximately 7.4% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Orchard Funding Group's payout ratio is within an average range for most market participants. Earnings per share are down, and Orchard Funding Group's dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think Orchard Funding Group may not be an ideal dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 4 warning signs for Orchard Funding 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 dividend stocks yielding above 3%.

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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. 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.
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