Johnson Matthey Plc (LON:JMAT) will pay a dividend of £0.22 on the 1st of February. Based on this payment, the dividend yield on the company's stock will be 3.7%, which is an attractive boost to shareholder returns.

Check out our latest analysis for Johnson Matthey

Johnson Matthey's Earnings Easily Cover The Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Johnson Matthey's earnings easily covered the dividend, but free cash flows were negative. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

Over the next year, EPS is forecast to expand by 45.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 33%, which is in the range that makes us comfortable with the sustainability of the dividend.

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 £0.61 in 2012 to the most recent total annual payment of £0.77. This works out to be a compound annual growth rate (CAGR) of approximately 2.4% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

Johnson Matthey May Find It Hard To Grow The Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Johnson Matthey's EPS has declined at around 4.2% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Johnson Matthey's payments, as there could be some issues with sustaining them into the future. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Johnson Matthey is a great stock to add to your portfolio if income is your focus.

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. For instance, we've picked out 1 warning sign for Johnson Matthey that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.