NCC Group plc's (LON:NCC) investors are due to receive a payment of UK£0.032 per share on 12th of November. Based on this payment, the dividend yield will be 1.6%, which is fairly typical for the industry.
NCC Group's Payment Has Solid Earnings Coverage
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, the company was paying out 131% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 45%. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.
Looking forward, earnings per share is forecast to rise by 101.5% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 66% which would be quite comfortable going to take the dividend forward.
NCC Group Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from UK£0.022 in 2011 to the most recent annual payment of UK£0.046. This implies that the company grew its distributions at a yearly rate of about 7.9% over that duration. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.
There Isn't Much Room To Grow The Dividend
Investors could be attracted to the stock based on the quality of its payment history. NCC Group has seen EPS rising for the last five years, at 7.5% per annum. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.
We'd also point out that NCC Group has issued stock equal to 11% of shares outstanding. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about NCC Group's payments, as there could be some issues with sustaining them into the future. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 3 warning signs for NCC Group that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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