Skellerup Holdings Limited (NZSE:SKL) will increase its dividend on the 15th of October to NZ$0.11. This will take the annual payment from 3.1% to 3.4% of the stock price, which is above what most companies in the industry pay.
Skellerup Holdings' Payment Has Solid Earnings Coverage
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Skellerup Holdings' dividend made up quite a large proportion of earnings but only 65% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
EPS is set to grow by 13.0% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 87%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2011, the dividend has gone from NZ$0.06 to NZ$0.17. This means that it has been growing its distributions at 11% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
Dividend Growth Could Be Constrained
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Skellerup Holdings has grown earnings per share at 14% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.
Our Thoughts On Skellerup Holdings' Dividend
In summary, while it's always good to see the dividend being raised, we don't think Skellerup Holdings' payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 1 warning sign for Skellerup Holdings that you should be aware of before investing. We have also put together a list of global stocks with a solid dividend.
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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