The board of discoverIE Group plc (LON:DSCV) has announced that it will be increasing its dividend by 6.3% on the 14th of January to UK£0.034. Even though the dividend went up, the yield is still quite low at only 1.1%.
View our latest analysis for discoverIE Group
discoverIE Group's Earnings Easily Cover the Distributions
It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Prior to this announcement, discoverIE Group's dividend made up quite a large proportion of earnings but only 31% of free cash flows. This leaves plenty of cash for reinvestment into the business.
Looking forward, earnings per share is forecast to rise by 53.7% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 56% which would be quite comfortable going to take the dividend forward.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2011, the dividend has gone from UK£0.075 to UK£0.10. This means that it has been growing its distributions at 3.3% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
discoverIE Group Could Grow Its Dividend
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. discoverIE Group has seen EPS rising for the last five years, at 9.8% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.
Our Thoughts On discoverIE Group's Dividend
Overall, we always like to see the dividend being raised, but we don't think discoverIE Group will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 3 warning signs for discoverIE Group that investors should know about before committing capital to this stock. 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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