Income hunting can be a tough sport. There’s more to finding the market’s best dividends than just searching for those companies with the highest dividend yields. You need to dig down into the numbers to establish whether or not the dividend payout is sustainable.
More often than not, those companies with the most eye-catching dividend yields end up cutting their payouts. On the other hand, stocks with the lowest yields can turn out to possess the most sustainable payouts.
One of the best dividends around
I believe Air Partner (LSE: AIR) has one of the most sustainable dividends of all income stocks listed in London. The company is a cash cow.
As a private jet broker, Air Partner has a high return on capital and no requirement for hefty capital spending. Most of the cash generated from operations is split between employees and shareholders, although over the past two years management has been investing heavily in acquisitions to grow the business and diversify. These acquisitions complement the group’s existing offering.
For example, back in May 2015, Air Partner paid £1.2m for Cabot Aviation, a leading global Aircraft Remarketing broker. In its filed accounts for the year ended 31 March 2014, Cabot Aviation achieved a profit before taxation of £274,000 on a turnover of £706,000. So it seems Air Partner acquired this new division for an extremely attractive price. Further acquisitions such as the buyout of air safety consultant Baines Simmons for £6m have followed.
Despite these deals, Air Partner still has plenty of firepower for further acquisitions and shareholder payouts. At the end of July 2016, the firm reported a net cash balance of £5.2m after the payment of dividends and acquisitions, up 274% year-on-year.
Over the next 12 months, City analysts expect the company to pay out 5.2p per share in dividends, equal to a dividend yield of 4.5% at current prices. While this isn’t the highest dividend yield around, Air Partner’s strong cash balance should reassure investors that the payout is here to stay. For the year ending 31 January 2017, the firm’s earnings per share are expected to grow by 26%, and analysts have pencilled-in a further 16% growth for 2018.
Air Partner is something of a model dividend stock. BT (LSE: BT) on the other hand does not have the same desirable income qualities.
An income stock to avoid
While shares in BT do support a forward dividend yield of 5.1% based on current analyst estimates, the company is facing numerous headwinds, all of which threaten to slow earnings growth and constrict cash flows.
Unlike Air Partner, BT’s net gearing is over 150% and over 300% including pension obligations. Meanwhile, the company is having to spend billions fighting off competitors by buying expensive sports broadcasting rights, which may not end up producing a return for the firm. Today the company revealed it would pay around £394m a year for the rights to broadcast all UEFA Champions League and Europa League football until the 2021 season.
City analysts are expecting BT’s earnings per share to fall 16% the year ending 31 March before rising 3% the following year.
So overall, if it’s income you’re after, I believe Air Partner is a much better buy than BT.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.