StepStone Group (NASDAQ:STEP) Is Paying Out A Larger Dividend Than Last Year

StepStone Group Inc. (NASDAQ:STEP) will increase its dividend from last year's comparable payment on the 15th of September to $0.21. This makes the dividend yield about the same as the industry average at 2.8%.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that StepStone Group's stock price has increased by 36% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for StepStone Group

StepStone Group Doesn't Earn Enough To Cover Its Payments

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, the company was paying out 358% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 65%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

If the company can't turn things around, EPS could fall by 91.2% over the next year. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 5,470%, which is definitely a bit high to be sustainable going forward.

StepStone Group Is Still Building Its Track Record

The company has maintained a consistent dividend for a few years now, but we would like to see a longer track record before relying on it. Since 2021, the dividend has gone from $0.28 total annually to $0.84. This works out to be a compound annual growth rate (CAGR) of approximately 73% a year over that time. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.

Dividend Growth Potential Is Shaky

Investors could be attracted to the stock based on the quality of its payment history. However, initial appearances might be deceiving. Over the last year, StepStone Group's EPS has fallen by 91%. Reduced dividend payments are a common consequence of declining earnings. Any one year of performance can be misleading for a variety of reasons, so we wouldn't like to form any strong conclusions based on these numbers alone.

StepStone Group's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think StepStone Group will make a great income stock. 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. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 5 warning signs for StepStone Group you should be aware of, and 1 of them is significant. 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.