Castings (LON:CGS) Will Pay A Larger Dividend Than Last Year At £0.0384

Castings P.L.C. (LON:CGS) has announced that it will be increasing its dividend from last year's comparable payment on the 5th of January to £0.0384. Despite this raise, the dividend yield of 4.5% is only a modest boost to shareholder returns.

Our analysis indicates that CGS is potentially undervalued!

Castings Is Paying Out More Than It Is Earning

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, Castings' dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 160% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.

Earnings per share is forecast to rise by 34.3% over the next year. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 102% over the next year.

Castings Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the annual payment back then was £0.118, compared to the most recent full-year payment of £0.162. This works out to be a compound annual growth rate (CAGR) of approximately 3.3% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth May Be Hard To Achieve

The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. Castings has seen earnings per share falling at 3.4% per year over the last five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Our Thoughts On Castings' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Castings is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Castings that investors should take into consideration. Is Castings 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.