When considering the dividend forecast for a stock for the next couple of years, it can provide me with some great information. The analysts that put out the forecasts are professionals that spend a lot of time researching a company. However, even if the forecast is good, I still need to be careful. Here’s why.
A struggling company
I came across Mobico Group (LSE: MCG) earlier this year, when the share price took a sharp move lower. The trend hasn’t changed since then, with the stock down a whopping 60% over the past year.
The company was formerly known as National Express group. It operates bus, train and coach services around the UK. With Covid-19 support ending and high inflation impacting wage costs, the business hasn’t performed well in 2023.
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In the half-year report, Mobico reported a loss after tax of £39.4m. This compares to a profit in H1 2022 of £15.2m.
Despite this fall, the company has still paid out income in the form of dividends over this time period. The dividend from the 2022 full-year results was paid in May at 5p per share. An interim dividend of 1.7p was also paid back in September.
Looking ahead
At the moment, analysts are projecting a fall in the dividend next year. This is likely comprised of a payment of 3.4p in May 2024, followed by 1.8p in the autumn. For 2025, there’s an expectation of 3.6p and 1.9p.
If we assume the share price remains the same, then the dividend yield is likely to fall from the current level of 9.85%. With a total dividend per share of 5.2p, it could fall to 7.65% in 2024, but rise to 8.08% in 2025.
This is a generous yield, one of the highest in the FTSE 250. Even with the recent problems, the company has a strong hold on the transport networks. It has a good list of pipeline opportunities (27 new contracts versus 16 in 2022). Further, it has high levels of retention from clients, such as 98% in School Bus services.
Why I need to be careful
Given the fall in the share price, it’s clear the business isn’t in a great spot right now. We’ll have to see what the full-year results look like, but I’d expect earnings to be heavily down.
As stated in the latest earnings report, “the Group’s policy is to maintain a dividend cover ratio in excess of two times”.
At the moment, the dividend cover is 2.1. This reflects how well the latest earnings can cover a planned dividend. So if the full-year results disappoint, this ratio should fall below two. In that case, I think there’s a threat that the dividend could be cut even more than forecast.
Not only would this reduce the dividend yield, but it could cause the share price to fall further. This is a high-risk stock for investors to consider. The future yield could be worth the risk, but I’m going to stay away right now.
