The board of Orchard Funding Group plc (LON:ORCH) has announced that it will pay a dividend of £0.02 per share on the 6th of January. Based on this payment, the dividend yield will be 6.3%, which is fairly typical for the industry.
Orchard Funding Group's Payment Has Solid Earnings Coverage
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Before making this announcement, Orchard Funding Group was earning enough to cover the dividend, but it wasn't generating any free cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.
If the trend of the last few years continues, EPS will grow by 2.6% over the next 12 months. If the dividend continues on this path, the payout ratio could be 43% by next year, which we think can be pretty sustainable going forward.
Orchard Funding Group's Dividend Has Lacked Consistency
Looking back, Orchard Funding Group's dividend hasn't been particularly consistent. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The dividend has gone from an annual total of £0.0281 in 2015 to the most recent total annual payment of £0.03. Dividend payments have been growing, but very slowly over the period. It's encouraging 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, which makes this less attractive as an income investment.
Dividend Growth May Be Hard To Achieve
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. However, Orchard Funding Group has only grown its earnings per share at 2.6% per annum over the past five years. The company has been growing at a pretty soft 2.6% per annum, and is paying out quite a lot of its earnings to shareholders. This isn't necessarily bad, but we wouldn't expect rapid dividend growth in the future.
Our Thoughts On Orchard Funding Group's Dividend
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. While Orchard Funding Group is earning enough to cover the payments, the cash flows are lacking. We don't think Orchard Funding 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. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 5 warning signs for Orchard Funding Group (of which 3 are a bit unpleasant!) you should know about. Is Orchard Funding Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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