Headlam Group (LON:HEAD) Will Pay A Dividend Of £0.06

Headlam Group plc (LON:HEAD) has announced that it will pay a dividend of £0.06 per share on the 7th of June. The dividend yield of 5.6% is still a nice boost to shareholder returns, despite the cut.

See our latest analysis for Headlam Group

Headlam Group's Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. This high of a dividend payment could start to put pressure on the balance sheet in the future.

Looking forward, earnings per share is forecast to rise by 62.6% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 61%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2014, the dividend has gone from £0.153 total annually to £0.10. Doing the maths, this is a decline of about 4.2% per year. A company that decreases its dividend over time generally isn't what we are looking for.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Headlam Group's EPS has declined at around 25% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

Headlam Group's Dividend Doesn't Look Great

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The company seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. The dividend doesn't inspire confidence that it will provide solid income in the future.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Headlam Group has 3 warning signs (and 1 which is significant) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.