Capital Appreciation Limited (JSE:CTA) will increase its dividend from last year's comparable payment on the 3rd of July to ZAR0.04. This takes the annual payment to 5.3% of the current stock price, which is about average for the industry.
View our latest analysis for Capital Appreciation
Capital Appreciation Is Paying Out More Than It Is Earning
Solid dividend yields are great, but they only really help us if the payment is sustainable. Before making this announcement, Capital Appreciation was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. This is a pretty unsustainable practice, and could be risky if continued for the long term.
Looking forward, EPS could fall by 4.9% if the company can't turn things around from the last few years. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 140%, which could put the dividend under pressure if earnings don't start to improve.
Capital Appreciation Doesn't Have A Long Payment History
Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. The annual payment during the last 5 years was ZAR0.04 in 2018, and the most recent fiscal year payment was ZAR0.085. This implies that the company grew its distributions at a yearly rate of about 16% over that duration. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.
Capital Appreciation May Find It Hard To Grow The Dividend
Investors could be attracted to the stock based on the quality of its payment history. However, initial appearances might be deceiving. Over the past five years, it looks as though Capital Appreciation's EPS has declined at around 4.9% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.
The Dividend Could Prove To Be Unreliable
In summary, while it's always good to see the dividend being raised, we don't think Capital Appreciation's payments are rock solid. The payments are bit high to be considered sustainable, and the track record isn't the best. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Capital Appreciation has 3 warning signs (and 1 which is potentially serious) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.