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The board of Bunge Limited (NYSE:BG) has announced that the dividend on 2nd of September will be increased to US$0.63, which will be 19% higher than last year. The announced payment will take the dividend yield to 2.5%, which is in line with the average for the industry.
See our latest analysis for Bunge
Bunge's Payment Has Solid Earnings Coverage
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Bunge is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.
Looking forward, earnings per share is forecast to fall by 3.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could be 19%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.
Bunge Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was US$1.00 in 2012, and the most recent fiscal year payment was US$2.10. This means that it has been growing its distributions at 7.7% per annum over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.
The Dividend Looks Likely To Grow
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. It's encouraging to see Bunge has been growing its earnings per share at 27% a year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Bunge's payments are rock solid. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Bunge has 7 warning signs (and 3 which are significant) we think you should know about. Is Bunge not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.