The board of Strix Group Plc (LON:KETL) has announced that it will be increasing its dividend by 5.8% on the 7th of October to UK£0.028. This takes the dividend yield from 2.2% to 2.2%, which shareholders will be pleased with.
Strix Group's Earnings Easily Cover the Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Strix Group's dividend was only 66% of earnings, however it was paying out 106% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
Over the next year, EPS is forecast to expand by 22.2%. If the dividend continues on this path, the payout ratio could be 65% by next year, which we think can be pretty sustainable going forward.
Strix Group's Dividend Has Lacked Consistency
Even in its short history, we have seen the dividend cut. The dividend has gone from UK£0.07 in 2017 to the most recent annual payment of UK£0.08. This means that it has been growing its distributions at 3.4% per annum over that time. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
The Dividend's Growth Prospects Are Limited
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. However, Strix Group's EPS was effectively flat over the past three years, which could stop the company from paying more every year.
Strix Group's Dividend Doesn't Look Sustainable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Strix Group 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. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 4 warning signs for Strix Group 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 performing dividend stock.
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