The board of Data#3 Limited (ASX:DTL) has announced that it will be paying its dividend of A$0.1065 on the 30th of September, an increased payment from last year's comparable dividend. The payment will take the dividend yield to 2.8%, which is in line with the average for the industry.
View our latest analysis for Data#3
Data#3's Dividend Is Well Covered By Earnings
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. The last dividend made up quite a large portion of free cash flows, and this was made worse by the lack of free cash flows. Generally, we think that this would be a risky long term practice.
Looking forward, earnings per share is forecast to rise by 51.3% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 69% which would be quite comfortable going to take the dividend forward.
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of A$0.078 in 2012 to the most recent total annual payment of A$0.179. This works out to be a compound annual growth rate (CAGR) of approximately 8.7% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Data#3 might have put its house in order since then, but we remain 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. It's encouraging to see that Data#3 has been growing its earnings per share at 14% a 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.
Data#3's Dividend Doesn't Look Sustainable
In summary, while it's always good to see the dividend being raised, we don't think Data#3's payments are rock solid. Strong earnings growth means Data#3 has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We would be a touch cautious of relying on this stock primarily for the dividend income.
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. Taking the debate a bit further, we've identified 1 warning sign for Data#3 that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.