There's A Lot To Like About Serco Group's (LON:SRP) Upcoming UK£0.011 Dividend
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 Serco Group plc (LON:SRP) is about to go ex-dividend in just 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Serco Group's shares on or after the 7th of September will not receive the dividend, which will be paid on the 6th of October.
The company's next dividend payment will be UK£0.011 per share. Last year, in total, the company distributed UK£0.031 to shareholders. Last year's total dividend payments show that Serco Group has a trailing yield of 2.0% on the current share price of £1.523. If you buy this business for its dividend, you should have an idea of whether Serco Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for Serco 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. Serco Group paid out just 17% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The good news is it paid out just 9.7% of its free cash flow in the last year.
It's positive to see that Serco 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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Serco Group's earnings have been skyrocketing, up 29% per annum for the past five years. Serco Group looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Serco Group has seen its dividend decline 11% per annum on average over the past 10 years, which is not great to see. Serco 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
From a dividend perspective, should investors buy or avoid Serco Group? Serco Group has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. Serco Group looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
On that note, you'll want to research what risks Serco Group is facing. We've identified 2 warning signs with Serco Group (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
