Sage Group (LON:SGE) Will Pay A Larger Dividend Than Last Year At £0.121

The board of The Sage Group plc (LON:SGE) has announced that the dividend on 10th of February will be increased to £0.121, which will be 4.0% higher than last year's payment of £0.116 which covered the same period. This takes the dividend yield to 2.3%, which shareholders will be pleased with.

Check out the opportunities and risks within the GB Software industry.

Sage Group's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Sage Group was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The business is earning enough to make the dividend feasible, but the cash payout ratio of 78% indicates it is more focused on returning cash to shareholders than growing the business.

The next year is set to see EPS grow by 37.8%. If the dividend continues along recent trends, we estimate the payout ratio will be 54%, which is in the range that makes us comfortable with the sustainability of the dividend.

Sage Group Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2012, the annual payment back then was £0.103, compared to the most recent full-year payment of £0.184. This implies that the company grew its distributions at a yearly rate of about 6.0% over that duration. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.

Dividend Growth May Be Hard To Achieve

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately, Sage Group's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Growth of 1.5% per annum is not particularly high, which might explain why the company is paying out a higher proportion of earnings. This isn't necessarily bad, but we wouldn't expect rapid dividend growth in the future.

Our Thoughts On Sage Group's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Sage Group's payments are rock solid. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Sage Group has been making. Overall, we don't think this company has the makings of a good income stock.

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. Taking the debate a bit further, we've identified 1 warning sign for Sage Group that investors need to be conscious of moving forward. Is Sage Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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