Is Begbies Traynor Group plc (LON:BEG) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
A 2.5% yield is nothing to get excited about, but investors probably think the long payment history suggests Begbies Traynor Group has some staying power. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we’ll go through this below.
Click the interactive chart for our full dividend analysis
AIM:BEG Historical Dividend Yield May 17th 2020
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Begbies Traynor Group paid out 85% of its profit as dividends. It’s paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Begbies Traynor Group’s cash payout ratio in the last year was 37%, which suggests dividends were well covered by cash generated by the business. It’s positive to see that Begbies Traynor Group’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Remember, you can always get a snapshot of Begbies Traynor Group’s latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Begbies Traynor Group’s dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was UK£0.028 in 2010, compared to UK£0.026 last year. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame.
We struggle to make a case for buying Begbies Traynor Group for its dividend, given that payments have shrunk over the past ten years.
Dividend Growth Potential
With a relatively unstable dividend, it’s even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there’s a good chance of bigger dividends in future? In the last five years, Begbies Traynor Group’s earnings per share have shrunk at approximately 3.1% per annum. If earnings continue to decline, the dividend may come under pressure. Every investor should make an assessment of whether the company is taking steps to stabilise the situation.
We’d also point out that Begbies Traynor Group issued a meaningful number of new shares in the past year. 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.
Conclusion
To summarise, shareholders should always check that Begbies Traynor Group’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Begbies Traynor Group has an acceptable payout ratio and its dividend is well covered by cashflow. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In sum, we find it hard to get excited about Begbies Traynor Group from a dividend perspective. It’s not that we think it’s a bad business; just that there are other companies that perform better on these criteria.
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. As an example, we’ve identified 3 warning signs for Begbies Traynor Group that you should be aware of before investing.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.