Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Hydrogen Group Plc (LON:HYDG) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 12th of September to receive the dividend, which will be paid on the 11th of October.
Hydrogen Group's next dividend payment will be UK£0.006 per share, and in the last 12 months, the company paid a total of UK£0.02 per share. Last year's total dividend payments show that Hydrogen Group has a trailing yield of 3.6% on the current share price of £0.555. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Hydrogen Group has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Hydrogen Group is paying out just 21% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Luckily it paid out just 22% of its free cash flow last year.
It's positive to see that Hydrogen 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?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Hydrogen Group, with earnings per share up 2.5% on average over the last five years. Growth has been anaemic. Yet with more than 75% of its earnings being kept in the business, there is ample room to reinvest in growth or lift the payout ratio - either of which could increase the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hydrogen Group's dividend payments per share have declined at 6.9% per year on average over the past 10 years, which is uninspiring. Hydrogen Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Is Hydrogen Group an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Hydrogen Group is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Hydrogen Group is halfway there. Hydrogen Group looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
Curious about whether Hydrogen Group has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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