Is ICT Group N.V. (AMS:ICT) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.
With a nine-year payment history and a 4.5% yield, many investors probably find ICT Group intriguing. It sure looks interesting on these metrics – but there’s always more to the story . Remember though, given the recent drop in its share price, ICT Group’s yield will look higher, even though the market may now be expecting a decline in its long-term prospects. There are a few simple ways to reduce the risks of buying ICT Group for its dividend, and we’ll go through these below.
Explore this interactive chart for our latest analysis on ICT Group!
ENXTAM:ICT Historical Dividend Yield May 13th 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. Looking at the data, we can see that 109% of ICT Group’s profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. ICT Group’s cash payout ratio last year was 21%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It’s good to see that while ICT Group’s dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we’d be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Is ICT Group’s Balance Sheet Risky?
As ICT Group’s dividend was not well covered by earnings, we need to check its balance sheet for signs of financial distress. A quick check of its financial situation can be done with two ratios: net debt divided by EBITDA (earnings before interest, tax, depreciation and amortisation), and net interest cover. Net debt to EBITDA measures total debt load relative to company earnings (lower = less debt), while net interest cover measures the ability to pay interest on the debt (higher = greater ability to pay interest costs). ICT Group has net debt of 1.46 times its EBITDA, which we think is not too troublesome.
Net interest cover can be calculated by dividing earnings before interest and tax (EBIT) by the company’s net interest expense. ICT Group has EBIT of 5.49 times its interest expense, which we think is adequate.
We update our data on ICT Group every 24 hours, so you can always get our latest analysis of its financial health, here.
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. Looking at the last decade of data, we can see that ICT Group paid its first dividend at least nine years ago. It’s good to see that ICT Group has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we’re concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was €0.29 in 2011, compared to €0.30 last year. Its dividends have grown at less than 1% per annum over this time frame.
It’s good 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. We’re not that enthused by this.
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? ICT Group’s EPS have fallen by approximately 21% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and ICT Group’s earnings per share, which support the dividend, have been anything but stable.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We’re not keen on the fact that ICT Group paid out such a high percentage of its income, although its cashflow is in better shape. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Overall, ICT Group falls short in several key areas here. Unless the investor has strong grounds for an alternative conclusion, we find it hard to get interested in a dividend stock with these characteristics.
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 instance, we’ve picked out 4 warning signs for ICT Group that investors should take into consideration.
If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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.
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