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Midwich Group plc (LON:MIDW) has announced that it will pay a dividend of £0.075 per share on the 4th of July. The dividend yield of 7.0% is still a nice boost to shareholder returns, despite the cut.
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. Midwich Group's stock price has reduced by 34% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
Midwich Group's Future Dividend Projections Appear Well Covered By Earnings
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Midwich Group was paying out 83% of earnings, but a comparatively small 65% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
Over the next year, EPS is forecast to fall by 4.1%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 93%, which is definitely on the higher side.
See our latest analysis for Midwich Group
Midwich Group's Dividend Has Lacked Consistency
Looking back, Midwich Group's dividend hasn't been particularly consistent. This makes us cautious about the consistency of the dividend over a full economic cycle. The dividend has gone from an annual total of £0.0306 in 2016 to the most recent total annual payment of £0.13. This means that it has been growing its distributions at 17% per annum over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
Dividend Growth Is Doubtful
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. In the last five years, Midwich Group's earnings per share has shrunk at approximately 6.3% per annum. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.
In Summary
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. 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. We would be a touch cautious of relying on this stock primarily for the dividend income.