Alexander Forbes Group Holdings Limited( JSE:AFH ) will pay a dividend of ZAR0.24 on the 12th of January. This will take the annual payment to 7.9% of the stock price, which is above what most companies in the industry pay.
Alexander Forbes Group Holdings' Future Dividends May Potentially Be At Risk
If the payments aren't sustainable, a high yield for a few years won't matter that much. Before making this announcement, Alexander Forbes Group Holdings' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.
EPS is set to grow by 30.9% over the next year if recent trends continue. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 98% over the next year.
See our latest analysis for Alexander Forbes Group Holdings
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of ZAR0.12 in 2015 to the most recent total annual payment of ZAR0.65. This works out to be a compound annual growth rate (CAGR) of approximately 18% a year over that time. Alexander Forbes Group Holdings has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
Alexander Forbes Group Holdings' Dividend Might Lack Growth
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that Alexander Forbes Group Holdings has grown earnings per share at 31% per year over the past five years. Although earnings per share is up nicely Alexander Forbes Group Holdings is paying out 103% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.
In Summary
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would be a touch cautious of relying on this stock primarily for the dividend income.
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. Taking the debate a bit further, we've identified 1 warning sign for Alexander Forbes Group Holdings that investors need to be conscious of moving forward. Is Alexander Forbes Group Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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This article by Simply Wall St is general in nature.
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