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When considering a stock's dividend forecast for the next few years, it can provide me with excellent information. The analysts who make forecasts are professionals who spend a lot of time researching a company. However, even if the prognosis is good, I must be careful. This is why.
A company in trouble
I came across Mobico Group (LSE: MCG) earlier this year, when the share price fell sharply. The trend hasn't changed since then, and the stock is down a whopping 60% over the past year.
The company was previously known as National Express group. It operates bus, train and coach services throughout the UK. With the end of Covid-19 support and high inflation affecting wage costs, the business has not performed well in 2023.
In the half-year report, Mobico reported an after-tax loss of £39.4m. This compares with a profit in the first half of 2022 of £15.2m.
Despite this drop, the company has still paid income in the form of dividends during this period. The 2022 full year results dividend was paid in May at 5 pence per share. An interim dividend of 1.7p was also returned in September.
Looking to the future
At the moment, analysts predict a drop in the dividend next year. This is likely to consist of a 3.4p payment in May 2024, followed by 1.8p in the autumn. By 2025, 3.6p and 1.9p are expected.
If we assume the share price remains the same, the dividend yield is likely to fall from the current level of 9.85%. With a total dividend per share of 5.2 pence, it could fall to 7.65% in 2024, but rise to 8.08% in 2025.
This is a generous performance, one of the highest in the world. FTSE 250. Even with recent problems, the company has a strong grip on transportation networks. It has a good list of opportunities in the pipeline (27 new contracts compared to 16 in 2022). In addition, it has high levels of customer retention, such as 98% in School Bus services.
Why do I need to be careful?
Given the drop in the share price, it's clear that the business is not in a good state at the moment. We'll have to see what the full year results look like, but I would expect earnings to be down considerably.
As indicated in the latest earnings report, “The Group's policy is to maintain a dividend coverage ratio of more than double.”
Currently, dividend coverage is 2.1. This reflects how well the latest earnings can cover a planned dividend. So if full-year results disappoint, this ratio should fall below two. In that case, I think there is a threat that the dividend will be cut even more than anticipated.
This would not only reduce the dividend yield, but could also cause the share price to fall further. This is a high risk stock that investors should consider. The future performance could be worth the risk, but I'll stay away right now.
