The board of Reunert Limited (JSE:RLO) has announced that the dividend on 26th of June will be increased to ZAR0.83, which will be 11% higher than last year's payment of ZAR0.75 which covered the same period. This makes the dividend yield 5.2%, which is above the industry average.
View our latest analysis for Reunert
Reunert's Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, Reunert was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The business is earning enough to make the dividend feasible, but the cash payout ratio of 83% indicates it is more focused on returning cash to shareholders than growing the business.
Unless the company can turn things around, EPS could fall by 3.1% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 54%, which we are pretty comfortable with and we think is feasible on an earnings basis.
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 annual payment during the last 10 years was ZAR3.48 in 2013, and the most recent fiscal year payment was ZAR2.99. The dividend has shrunk at around 1.5% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
Reunert 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. Reunert has seen earnings per share falling at 3.1% per year over the last five years. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed.
Our Thoughts On Reunert's Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Reunert has been making. We would probably look elsewhere for an income investment.
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. For example, we've identified 2 warning signs for Reunert (1 is potentially serious!) 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.