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Cochlear Limited (ASX:COH) has announced that it will be increasing its dividend from last year's comparable payment on the 14th of April to A$2.15. This takes the annual payment to 1.6% of the current stock price, which is about average for the industry.
View our latest analysis for Cochlear
Cochlear's Future Dividend Projections Appear Well Covered By Earnings
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Before making this announcement, Cochlear was paying out quite a large proportion of both earnings and cash flow, with the dividend being 112% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.
Looking forward, earnings per share is forecast to rise by 50.3% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 52%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2015, the annual payment back then was A$2.54, compared to the most recent full-year payment of A$4.30. This implies that the company grew its distributions at a yearly rate of about 5.4% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Cochlear might have put its house in order since then, but we remain cautious.
Dividend Growth May Be Hard To Achieve
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. Unfortunately, Cochlear's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Cochlear's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.
Cochlear's Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think Cochlear will make a great income stock. The payments are bit high to be considered sustainable, and the track record isn't the best. We would be a touch cautious of relying on this stock primarily for the dividend income.