Is Intermediate Capital Group plc (LON:ICP) A Risky Dividend Stock?

Today we'll take a closer look at Intermediate Capital Group plc (LON:ICP) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A 2.8% yield is nothing to get excited about, but investors probably think the long payment history suggests Intermediate Capital Group has some staying power. There are a few simple ways to reduce the risks of buying Intermediate Capital Group for its dividend, and we'll go through these below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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, Intermediate Capital Group paid out 97% of its profit as dividends. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

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

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Intermediate Capital 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 been cut one or more times over this time. During the past 10-year period, the first annual payment was UK£0.2 in 2011, compared to UK£0.5 last year. Dividends per share have grown at approximately 8.6% per year over this time. The dividends haven't grown at precisely 8.6% every year, but this is a useful way to average out the historical rate of growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential

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. Over the past five years, it looks as though Intermediate Capital Group's EPS have declined at around 3.8% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

To summarise, shareholders should always check that Intermediate Capital Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Intermediate Capital Group is paying out a larger percentage of its profit than we're comfortable with. Earnings per share are down, and Intermediate Capital Group's dividend has been cut at least once in the past, which is disappointing. In short, we're not keen on Intermediate Capital Group from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.

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 Intermediate Capital Group that investors need to be conscious of moving forward.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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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