- Oops!Something went wrong.Please try again later.
The board of AJ Bell plc (LON:AJB) has announced that it will be increasing its dividend on the 1st of July to UK£0.028. This will take the dividend yield from 2.6% to 4.5%, providing a nice boost to shareholder returns.
AJ Bell Is Paying Out More Than It Is Earning
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, AJ Bell was paying out 76% of earnings, but a comparatively small 66% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
Over the next year, EPS is forecast to expand by 12.0%. If the dividend continues on its recent course, the payout ratio in 12 months could be 136%, which is a bit high and could start applying pressure to the balance sheet.
AJ Bell Is Still Building Its Track Record
The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 3 years, which isn't that long in the grand scheme of things. Since 2019, the first annual payment was UK£0.03, compared to the most recent full-year payment of UK£0.07. This works out to be a compound annual growth rate (CAGR) of approximately 32% a year over that time. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.
AJ Bell's Dividend Might Lack Growth
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. AJ Bell has impressed us by growing EPS at 19% per year over the past five years. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.
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 don't think AJ Bell is a great stock to add to your portfolio if income is your focus.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for AJ Bell that investors should take into consideration. Is AJ Bell not quite the opportunity you were looking for? Why not check out our selection of top 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.