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Tandem Group plc (LON:TND) has announced that it will pay a dividend of £0.0657 per share on the 6th of July. This makes the dividend yield 3.9%, which will augment investor returns quite nicely.
Check out our latest analysis for Tandem Group
Tandem Group's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Tandem Group was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. Generally, we think that this would be a risky long term practice.
The next year is set to see EPS grow by 29.9%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 74% which brings it into quite a comfortable range.
Tandem Group Has A Solid Track Record
The company has an extended history of paying stable dividends. The dividend has gone from an annual total of £0.0315 in 2013 to the most recent total annual payment of £0.10. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.
Dividend Growth Potential Is Shaky
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, initial appearances might be deceiving. Tandem Group's earnings per share has shrunk at 19% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
The Dividend Could Prove To Be Unreliable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We don't think Tandem Group is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 4 warning signs for Tandem Group that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.