HomeServe plc (LON:HSV) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 5th of December, you won't be eligible to receive this dividend, when it is paid on the 7th of January.
HomeServe's next dividend payment will be UK£0.058 per share. Last year, in total, the company distributed UK£0.21 to shareholders. Based on the last year's worth of payments, HomeServe stock has a trailing yield of around 1.8% on the current share price of £12.05. If you buy this business for its dividend, you should have an idea of whether HomeServe's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. HomeServe is paying out an acceptable 67% 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. Over the last year, it paid out dividends equivalent to 282% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
HomeServe paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were HomeServe to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see HomeServe's earnings have been skyrocketing, up 58% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. HomeServe has delivered an average of 11% per year annual increase in its dividend, based on the past ten years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
To Sum It Up
Is HomeServe worth buying for its dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note HomeServe paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, it's hard to get excited about HomeServe from a dividend perspective.
Wondering what the future holds for HomeServe? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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