Hargreaves Services' (LON:HSP) Dividend Will Be Increased To £0.176

The board of Hargreaves Services Plc (LON:HSP) has announced that it will be paying its dividend of £0.176 on the 31st of October, an increased payment from last year's comparable dividend. This takes the annual payment to 3.9% of the current stock price, which unfortunately is below what the industry is paying.

View our latest analysis for Hargreaves Services

Hargreaves Services' Payment Has Solid Earnings Coverage

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Hargreaves Services is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Over the next year, EPS is forecast to fall by 62.0%. If the dividend continues along recent trends, we estimate the payout ratio could be 44%, 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

The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was £0.155 in 2012, and the most recent fiscal year payment was £0.204. This means that it has been growing its distributions at 2.8% per annum over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Hargreaves Services has seen EPS rising for the last five years, at 43% per annum. Rapid earnings growth and a low payout ratio suggest this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Hargreaves Services will make a great income stock. While Hargreaves Services is earning enough to cover the payments, the cash flows are lacking. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 4 warning signs for Hargreaves Services (of which 2 are a bit concerning!) you should know about. Is Hargreaves Services not quite the opportunity you were looking for? Why not check out our selection of top 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.