Compass Group PLC (LON:CPG) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 16th of January will not receive the dividend, which will be paid on the 24th of February.
Compass Group's next dividend payment will be UK£0.27 per share. Last year, in total, the company distributed UK£0.40 to shareholders. Calculating the last year's worth of payments shows that Compass Group has a trailing yield of 2.1% on the current share price of £19.125. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Compass Group can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Compass Group is paying out an acceptable 57% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Compass Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Compass Group earnings per share are up 6.6% per annum over the last five years. Decent historical earnings per share growth suggests Compass Group has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Compass Group has increased its dividend at approximately 11% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
From a dividend perspective, should investors buy or avoid Compass Group? Earnings per share have been growing modestly and Compass Group paid out a bit over half of its earnings and free cash flow last year. In summary, it's hard to get excited about Compass Group from a dividend perspective.
Wondering what the future holds for Compass Group? See what the 18 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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