FirstRand Limited (JSE:FSR) has announced that it will be increasing its dividend from last year's comparable payment on the 3rd of April to ZAR1.89. This makes the dividend yield 5.7%, which is above the industry average.

View our latest analysis for FirstRand

FirstRand's Earnings Will Easily Cover The Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much.

FirstRand has a long history of paying out dividends, with its current track record at a minimum of 10 years. Past distributions do not necessarily guarantee future ones, but FirstRand's payout ratio of 60% is a good sign as this means that earnings decently cover dividends.

Over the next 3 years, EPS is forecast to expand by 18.7%. Analysts forecast the future payout ratio could be 60% over the same time horizon, which is a number we think the company can maintain.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from an annual total of ZAR1.02 in 2013 to the most recent total annual payment of ZAR3.78. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. FirstRand has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Has Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that FirstRand has grown earnings per share at 6.6% per year over the past five years. Shareholders are getting plenty of the earnings returned to them, which combined with strong growth makes this quite appealing.

In Summary

Overall, this is a reasonable dividend, and it being raised is an added bonus. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. The payment isn't stellar, but it could make a decent addition to a dividend portfolio.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 2 warning signs for FirstRand (1 is a bit concerning!) that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.