Kaap Agri Limited (JSE:KAL) has announced that it will be increasing its dividend from last year's comparable payment on the 20th of February to ZAR1.22. This makes the dividend yield 4.1%, which is above the industry average.
View our latest analysis for Kaap Agri
Kaap Agri's Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, Kaap Agri was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share could rise by 10.5% over the next year if the trend from the last few years continues. If the dividend continues on this path, the payout ratio could be 29% by next year, which we think can be pretty sustainable going forward.
Kaap Agri's Dividend Has Lacked Consistency
Kaap Agri has been paying dividends for a while, but the track record isn't stellar. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2017, the annual payment back then was ZAR0.826, compared to the most recent full-year payment of ZAR1.68. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Kaap Agri has impressed us by growing EPS at 10% per year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Kaap Agri's prospects of growing its dividend payments in the future.
Our Thoughts On Kaap Agri's Dividend
Overall, we always like to see the dividend being raised, but we don't think Kaap Agri will make a great income stock. While Kaap Agri is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 Kaap Agri (1 doesn't sit too well with us!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.