Benefit Systems SA (WSE:BFT) announced that it will increase its dividend on November 25 to PLN 135.00 compared to last year’s payout. This puts the dividend yield at 5.1%, which is above the industry average.

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The income from the performance systems easily covers the distributions

We like to see solid dividend yields, but that doesn’t matter if the payment isn’t sustainable. Before this announcement, Benefit Systems was paying out 83% of profits but a comparatively low 55% of free cash flow. Since the dividend is just the return of cash to shareholders, we care more about the payout ratio, as we can see that there is plenty left over for reinvestment in the business.

Next year, EPS is expected to grow by 22.5%, and if recent dividend patterns continue, the payout ratio in 12 months could be 83%, which is a bit high but may well be sustainable.

Dividend volatility

Although the company has been paying dividends for a long time, it has cut them at least once in the last 10 years. The annual payment over the last 10 years was PLN 7.50 in 2014 and the last payment in the financial year was PLN 135.00. This means that the company has increased its distributions by about 34% annually during this period. Strong growth in dividend payments is encouraging, but cuts are worrying as they could be a sign that the distribution policy is too ambitious.

Benefit Systems dividend may not grow

With a relatively unstable dividend, it’s even more important to see if earnings per share are growing. Benefit Systems has seen earnings per share grow 33% per year over the past five years. Earnings per share are growing well, but the company is paying out most of its profit as dividends. This could be sustainable, but we wonder why Benefit Systems isn’t retaining those profits to reinvest in growth.

In summary

To sum up, while it’s always good to see a dividend increase, we don’t think Benefit Systems’ payments are completely reliable. In the past, payments have been unstable, but in the short term, the dividend could be reliable as the company generates enough cash to cover it. This company is not in the top tier of income-producing stocks.

Market movements show how highly a consistent dividend policy is valued compared to a more erratic one. However, there are other things investors need to consider when analyzing stock performance. As an example, we found: 1 warning signal for performance systems that you should consider before investing. If you are a dividend investor, you should also check out our curated list of high dividend stocks.

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