Softcat's (LON:SCT) Upcoming Dividend Will Be Larger Than Last Year's

Softcat plc's (LON:SCT) dividend will be increasing to UK£0.073 on 13th of May. The announced payment will take the dividend yield to 2.5%, which is in line with the average for the industry.

View our latest analysis for Softcat

Softcat's Dividend Is Well Covered By Earnings

Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, Softcat's dividend was only 42% of earnings, however it was paying out 95% 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.

Over the next year, EPS is forecast to expand by 2.5%. If the dividend continues on this path, the payout ratio could be 33% by next year, which we think can be pretty sustainable going forward.

Softcat's Dividend Has Lacked Consistency

Softcat has been paying dividends for a while, but the track record isn't stellar. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2016, the first annual payment was UK£0.034, compared to the most recent full-year payment of UK£0.42. This means that it has been growing its distributions at 52% per annum over that time. Softcat has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Softcat has seen EPS rising for the last five years, at 22% per annum. Softcat is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

Our Thoughts On Softcat's Dividend

Overall, we always like to see the dividend being raised, but we don't think Softcat will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Softcat is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 1 warning sign for Softcat that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield 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.