Skellerup Holdings Limited (NZSE:SKL) will increase its dividend from last year's comparable payment on the 13th of October to NZ$0.1524. This will take the dividend yield to an attractive 5.2%, providing a nice boost to shareholder returns.
Skellerup Holdings' Payment Has Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, Skellerup Holdings was paying out 85% of earnings and more than 75% of free cash flows. This is usually an indication that the focus of the company is returning cash to shareholders rather than reinvesting it for growth.
EPS is set to grow by 23.3% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 82% which is a bit high but can definitely be sustainable.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The annual payment during the last 10 years was NZ$0.08 in 2013, and the most recent fiscal year payment was NZ$0.22. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. Skellerup Holdings has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
Skellerup Holdings' Dividend Might Lack Growth
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. We are encouraged to see that Skellerup Holdings has grown earnings per share at 13% per year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Strong earnings growth means Skellerup Holdings has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. Overall, we don't think this company has the makings of a good income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Skellerup Holdings that investors should take into consideration. Is Skellerup Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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