Castings (LON:CGS) Is Paying Out A Larger Dividend Than Last Year

The board of Castings P.L.C. (LON:CGS) has announced that it will be increasing its dividend on the 19th of August to UK£0.13. Based on the announced payment, the dividend yield for the company will be 9.6%, which is fairly typical for the industry.

Check out our latest analysis for Castings

Castings Doesn't Earn Enough To Cover Its Payments

Unless the payments are sustainable, the dividend yield doesn't mean too much. At the time of the last dividend payment, Castings was paying out a very large proportion of what it was earning and 116% of cash flows. Paying out such a high proportion of cash flows can expose the business to needing to cut the dividend if the business runs into some challenges.

Over the next year, EPS is forecast to expand by 43.9%. If the dividend continues on its recent course, the payout ratio in 12 months could be 113%, which is a bit high and could start applying pressure to the balance sheet.

Castings Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The first annual payment during the last 10 years was UK£0.12 in 2012, and the most recent fiscal year payment was UK£0.16. This works out to be a compound annual growth rate (CAGR) of approximately 3.3% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Dividend Growth Is Doubtful

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Let's not jump to conclusions as things might not be as good as they appear on the surface. It's not great to see that Castings' earnings per share has fallen at approximately 8.0% per year over the past five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for Castings that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.