Hill & Smith Holdings (LON:HILS) Is Increasing Its Dividend To £0.13

Hill & Smith Holdings PLC's (LON:HILS) periodic dividend will be increasing on the 6th of January to £0.13, with investors receiving 8.3% more than last year's £0.12. Despite this raise, the dividend yield of 2.5% is only a modest boost to shareholder returns.

See our latest analysis for Hill & Smith Holdings

Hill & Smith Holdings' Earnings Easily Cover The Distributions

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, Hill & Smith Holdings' dividend was only 52% of earnings, however it was paying out 108% of free cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

The next year is set to see EPS grow by 35.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 39%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2012, the annual payment back then was £0.132, compared to the most recent full-year payment of £0.31. This works out to be a compound annual growth rate (CAGR) of approximately 8.9% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Hill & Smith Holdings might have put its house in order since then, but we remain cautious.

The Dividend's Growth Prospects Are Limited

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. However, Hill & Smith Holdings' EPS was effectively flat over the past five years, which could stop the company from paying more every year. Growth of 1.0% per annum is not particularly high, which might explain why the company is paying out a higher proportion of earnings. This could mean the dividend doesn't have the growth potential we look for going into the future.

Our Thoughts On Hill & Smith Holdings' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Hill & Smith Holdings that investors should know about before committing capital to this stock. Is Hill & Smith Holdings 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.