Headlam Group (LON:HEAD) Has Announced That Its Dividend Will Be Reduced To £0.04

Headlam Group plc (LON:HEAD) is reducing its dividend to £0.04 on the 28th of Novemberwhich is 35% less than last year's comparable payment of £0.062. However, the dividend yield of 7.7% is still a decent boost to shareholder returns.

Check out our latest analysis for Headlam Group

Headlam Group's Payment Has Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Headlam Group was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.

Over the next year, EPS is forecast to fall by 19.4%. If the dividend continues along recent trends, we estimate the payout ratio could be 73%, 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. Since 2013, the dividend has gone from £0.149 total annually to £0.174. This works out to be a compound annual growth rate (CAGR) of approximately 1.6% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Dividend Growth Is Doubtful

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. In the last five years, Headlam Group's earnings per share has shrunk at approximately 8.4% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.

Our Thoughts On Headlam Group's Dividend

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While Headlam Group is earning enough to cover the dividend, we are generally unimpressed with its future prospects. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Headlam Group that you should be aware of before investing. Is Headlam Group 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.