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Diversified Royalty Corp. (TSE:DIV) has announced that it will pay a dividend of CA$0.0208 per share on the 31st of October. Based on this payment, the dividend yield on the company's stock will be 8.2%, which is an attractive boost to shareholder returns.
Check out our latest analysis for Diversified Royalty
Diversified Royalty's Future Dividends May Potentially Be At Risk
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, the dividend made up 117% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
EPS is set to fall by 2.7% over the next 12 months. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 139%, which is definitely a bit high to be sustainable going forward.
Diversified Royalty Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2014, the annual payment back then was CA$0.188, compared to the most recent full-year payment of CA$0.25. This works out to be a compound annual growth rate (CAGR) of approximately 2.9% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Diversified Royalty Might Find It Hard To Grow Its Dividend
The company's investors will be pleased to have been receiving dividend income for some time. We are encouraged to see that Diversified Royalty has grown earnings per share at 15% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.
An additional note is that the company has been raising capital by issuing stock equal to 15% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.
Diversified Royalty's Dividend Doesn't Look Sustainable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Diversified Royalty's payments, as there could be some issues with sustaining them into the future. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would probably look elsewhere for an income investment.