It Might Not Be A Great Idea To Buy Information Services Group, Inc. (NASDAQ:III) For Its Next Dividend
Information Services Group, Inc. (NASDAQ:III) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Information Services Group's shares on or after the 18th of March will not receive the dividend, which will be paid on the 28th of March.
The company's next dividend payment will be US$0.045 per share. Last year, in total, the company distributed US$0.18 to shareholders. Looking at the last 12 months of distributions, Information Services Group has a trailing yield of approximately 4.5% on its current stock price of US$3.97. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Information Services Group
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. Information Services Group distributed an unsustainably high 138% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. The company paid out 98% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.
Cash is slightly more important than profit from a dividend perspective, but given Information Services Group's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That explains why we're not overly excited about Information Services Group's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Minimal earnings growth, combined with concerningly high payout ratios suggests that Information Services Group is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past three years, Information Services Group has increased its dividend at approximately 14% a year on average.
To Sum It Up
Is Information Services Group an attractive dividend stock, or better left on the shelf? Earnings per share are effectively flat, plus Information Services Group's dividend is not well covered by either earnings or cash flow, which is not great. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that in mind though, if the poor dividend characteristics of Information Services Group don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 3 warning signs for Information Services Group (of which 2 can't be ignored!) you should know about.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.
