iomart Group plc (LON:IOM) is reducing its dividend from last year’s comparable payment to £0.013 on the 31st of January. This means the annual payment is 5.7% of the current stock price, which is above the average for the industry.
Check out our latest analysis for iomart Group
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, iomart Group’s dividend was higher than its profits, but the free cash flows quite comfortably covered it. 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.
Earnings per share is forecast to rise by 56.9% over the next year. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 96% over the next year.
The company has a long dividend track record, but it doesn’t look great with cuts in the past. The annual payment during the last 10 years was £0.0175 in 2015, and the most recent fiscal year payment was £0.043. This works out to be a compound annual growth rate (CAGR) of approximately 9.4% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though iomart Group’s EPS has declined at around 25% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. It’s not all bad news though, as the earnings are predicted to rise over the next 12 months – we would just be a bit cautious until this becomes a long term trend.
In summary, dividends being cut isn’t ideal, however it can bring the payment into a more sustainable range. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn’t been great. We would probably look elsewhere for an income investment.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we’ve identified 3 warning signs for iomart Group that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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