Smart Metering Systems plc (LON:SMS) has announced that it will be increasing its periodic dividend on the 26th of October to £0.0832, which will be 10% higher than last year's comparable payment amount of £0.0756. This will take the annual payment to 4.8% of the stock price, which is above what most companies in the industry pay.
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before this announcement, Smart Metering Systems was paying out 250% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
Earnings per share is forecast to rise by 46.1% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could get very high, which probably can't continue without starting to put some pressure on the balance sheet.
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was £0.023 in 2013, and the most recent fiscal year payment was £0.303. This implies that the company grew its distributions at a yearly rate of about 29% over that duration. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Unfortunately things aren't as good as they seem. Over the past five years, it looks as though Smart Metering Systems' EPS has declined at around 4.2% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. 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.
Overall, we always like to see the dividend being raised, but we don't think Smart Metering Systems will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 2 warning signs for Smart Metering Systems you should be aware of, and 1 of them is significant. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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