Appreciate Group plc's (LON:APP) dividend will be increasing to UK£0.012 on 3rd of October. This takes the dividend yield to 6.0%, which shareholders will be pleased with.
Appreciate Group's Earnings Easily Cover the Distributions
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Appreciate Group was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. This is a pretty unsustainable practice, and could be risky if continued for the long term.
Looking forward, earnings per share is forecast to rise by 71.0% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 38% which brings it into quite a comfortable range.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from UK£0.02 in 2012 to the most recent annual payment of UK£0.024. This implies that the company grew its distributions at a yearly rate of about 1.8% over that duration. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.
Dividend Growth Potential Is Shaky
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Over the past five years, it looks as though Appreciate Group's EPS has declined at around 15% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. 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.
The Dividend Could Prove To Be Unreliable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 3 warning signs for Appreciate Group that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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