Softcat's (LON:SCT) Shareholders Will Receive A Bigger Dividend Than Last Year
Softcat plc (LON:SCT) will increase its dividend on the 24th of May to £0.08, which is 9.6% higher than last year's payment from the same period of £0.073. This will take the annual payment to 2.8% of the stock price, which is above what most companies in the industry pay.
See our latest analysis for Softcat
Softcat's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Softcat was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 78% indicates it is more focused on returning cash to shareholders than growing the business.
The next year is set to see EPS grow by 12.2%. Assuming the dividend continues along recent trends, we think the payout ratio could be 43% by next year, which is in a pretty sustainable range.
Softcat's Dividend Has Lacked Consistency
Looking back, Softcat's dividend hasn't been particularly consistent. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The annual payment during the last 7 years was £0.034 in 2016, and the most recent fiscal year payment was £0.372. This works out to be a compound annual growth rate (CAGR) of approximately 41% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
The Dividend Looks Likely To Grow
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Softcat has grown earnings per share at 20% per year over the past five years. Softcat is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.
Our Thoughts On Softcat's Dividend
Overall, we always like to see the dividend being raised, but we don't think Softcat will make a great income stock. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Softcat has been making. Overall, we don't think this company has the makings of a good income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Softcat that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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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.
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