The board of Synthomer plc (LON:SYNT) has announced that it will be increasing its dividend on the 5th of July to UK£0.21. This will take the dividend yield from 9.8% to 9.8%, providing a nice boost to shareholder returns.
Synthomer's Dividend Is Well Covered By Earnings
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, Synthomer was quite comfortably earning enough to cover the dividend. This indicates that quite a large proportion of earnings is being invested back into the business.
Over the next year, EPS is forecast to fall by 20.4%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 90%, which is definitely on the higher side.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2012, the first annual payment was UK£0.024, compared to the most recent full-year payment of UK£0.30. This works out to be a compound annual growth rate (CAGR) of approximately 29% 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.
Synthomer Could Grow Its Dividend
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 Synthomer has grown earnings per share at 6.6% per year over the past five years. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.
Overall, it's great to see the dividend being raised and that it is still in a sustainable range. While the payout ratios are a good sign, we are less enthusiastic about the company's dividend record. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Just as an example, we've come across 5 warning signs for Synthomer you should be aware of, and 1 of them is a bit unpleasant. Is Synthomer not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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