This income stock has a dividend forecast of over 8.5%! What’s going on?
Income stocks with a dividend yield over double the index average always catch my eye. They need to be treated carefully as the underlying reason for the high yield might not be sustainable in the long term. So when I saw that the forecast for one stock was very high, I decided to dig a little deeper.
Job hunting
I’m talking about PageGroup (LSE:PAGE). The business is a well-known specialist professional recruitment firm that helps companies hire staff across a range of sectors and regions. It’s a simple business model, with the company getting paid recruitment fees for placing successful candidates in roles.
Over the past year, the stock is down 37%. This is due to a few factors right now. Hiring markets are subdued, with reasons being cited including economic and geopolitical uncertainty. The firm has cut significant headcount among recruiters to reduce costs and adapt to weaker demand. While this helps the cost base, it also reflects reduced business activity and confidence.
From a financial perspective, things haven’t been great either. Last month, the quarterly update showed gross profit down by 4.6% versus the same period last year. However, the interim dividend from last year was held at the same amount as the prior year, so income investors haven’t seen any change yet.
Dividend forecasts
The total dividend per share from the past year was 17.11p. Using the current share price, this gives a dividend yield of 8.16%. Looking ahead, the total dividend for this year is forecasted to be 17.53p, with 2027 expected to rise further to 17.97p. If this proves to be correct, and the share price stays the same, the yield could rise to 8.56%.
Some might be sceptical that the dividend can rise based on the difficulties over the past year. Even though there are risks going forward, there are reasons to be positive for the outlook. For example, the business is growing well internationally. Last quarter was the fifth consecutive one of growth in the US market, with Asia also recording a third consecutive quarter of growth. If this continues, profits from these areas can offset weaker geographies.
Further, even though cost-cutting makes the company smaller, it’ll make it more financially streamlined. With an estimated £15m worth of cost savings from this year, it should help the dividend to be protected as profits should stabilise due to the lower costs.
Making a call
The fall in the share price over the past year has acted to artificially boost the dividend yield. That’s not a great sign. However, I think the worst of the troubles is behind us now, so I agree that the dividend payouts can be continued. Yet it’s a high-risk play in my book, so I believe it should only be considered by investors who are happy with the risks.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
