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Supply Network Limited's (ASX:SNL) periodic dividend will be increasing on the 3rd of October to A$0.20, with investors receiving 67% more than last year's A$0.12. This takes the annual payment to 2.4% of the current stock price, which is about average for the industry.
View our latest analysis for Supply Network
Supply Network's Payment Has Solid Earnings Coverage
We aren't too impressed by dividend yields unless they can be sustained over time. The last dividend was quite comfortably covered by Supply Network's earnings, but it was a bit tighter on the cash flow front. The business is earning enough to make the dividend feasible, but the cash payout ratio of 79% indicates it is more focused on returning cash to shareholders than growing the business.
Looking forward, earnings per share is forecast to rise by 38.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 63%, which is in the range that makes us comfortable with the sustainability of the dividend.
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2012, the dividend has gone from A$0.06 total annually to A$0.24. This works out to be a compound annual growth rate (CAGR) of approximately 15% a year over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Looks Likely To Grow
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Supply Network has impressed us by growing EPS at 26% per year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.
In Summary
Overall, we always like to see the dividend being raised, but we don't think Supply Network will make a great income stock. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Supply Network that investors should take into consideration. Is Supply Network not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.