Midwich Group's (LON:MIDW) Dividend Will Be Increased To £0.055

The board of Midwich Group plc (LON:MIDW) has announced that it will be increasing its dividend by 22% on the 27th of October to £0.055, up from last year's comparable payment of £0.045. This will take the annual payment to 3.8% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for Midwich Group

Midwich 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. Prior to this announcement, Midwich Group's dividend made up quite a large proportion of earnings but only 74% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Looking forward, earnings per share is forecast to rise by 30.2% over the next year. If the dividend continues on this path, the payout ratio could be 68% by next year, which we think can be pretty sustainable going forward.

Midwich Group's Dividend Has Lacked Consistency

Looking back, Midwich Group's dividend hasn't been particularly consistent. This suggests that the dividend might not be the most reliable. Since 2016, the dividend has gone from £0.0306 total annually to £0.15. This means that it has been growing its distributions at 25% per annum over that time. Midwich Group 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's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Midwich Group has seen earnings per share falling at 2.3% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

We should note that Midwich Group has issued stock equal to 15% 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.

Our Thoughts On Midwich Group's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Midwich Group's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 3 warning signs for Midwich Group that investors should know about before committing capital to this stock. Is Midwich Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.