Editor’s Note
This analysis examines the sustainability of G8 Education’s dividend, highlighting its attractive yield while cautioning investors to also consider share price volatility as a key component of total returns.
The board of G8 Education Limited (ASX:GEM) has announced that it will pay a dividend of A$0.02 per share on the 3rd of October. Based on this payment, the dividend yield on the company’s stock will be 6.4%, which is an attractive boost to shareholder returns.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. G8 Education’s stock price has reduced by 30% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Based on the last payment, G8 Education was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
Over the next year, EPS is forecast to expand by 43.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 35%, which is in the range that makes us comfortable with the sustainability of the dividend.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was A$0.24 in 2015, and the most recent fiscal year payment was A$0.055. This works out to a decline of approximately 77% over that time. Generally, we don’t like to see a dividend that has been declining over time as this can degrade shareholders’ returns and indicate that the company may be running into problems.
Dividends have been going in the wrong direction, so we definitely want to see a different trend in the earnings per share. G8 Education has impressed us by growing EPS at 61% per year over the past five years. The company doesn’t have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.
Overall, we like to see the dividend staying consistent, and we think G8 Education might even raise payments in the future. Earnings are easily covering distributions, and the company is generating plenty of cash. Taking this all into consideration, this looks like it could be a good dividend opportunity.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company.