SEEK Limited's (ASX:SEK) dividend will be increasing from last year's payment of the same period to A$0.21 on 4th of October. This will take the annual payment to 1.9% of the stock price, which is above what most companies in the industry pay.
SEEK's Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, SEEK was quite comfortably earning enough to cover the dividend. This means that a large portion of its earnings are being retained to grow the business.
The next year is set to see EPS grow by 35.9%. If the dividend continues on this path, the payout ratio could be 45% by next year, which we think can be pretty sustainable going forward.
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the dividend has gone from A$0.15 total annually to A$0.44. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
Dividend Growth May Be Hard To Come By
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that SEEK's earnings per share has fallen at approximately 7.0% per year over the past five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
In summary, while it's always good to see the dividend being raised, we don't think SEEK's payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for SEEK that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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