Pendal Group Limited (ASX:PDL) will increase its dividend on the 16th of December to AU$0.24. This will take the annual payment from 6.7% to 6.7% of the stock price, which is above what most companies in the industry pay.
Pendal Group's Earnings Easily Cover the Distributions
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. The last payment made up 79% of earnings, but cash flows were much higher. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Looking forward, earnings per share is forecast to fall by 4.9% over the next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 94% in the next 12 months, which is on the higher end of the range we would say is sustainable.
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2011, the dividend has gone from AU$0.16 to AU$0.41. This implies that the company grew its distributions at a yearly rate of about 9.9% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Pendal Group might have put its house in order since then, but we remain cautious.
Pendal Group 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. Pendal Group has seen earnings per share falling at 3.1% per year over the last five years. 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.
We'd also point out that Pendal Group has issued stock equal to 20% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Overall, we always like to see the dividend being raised, but we don't think Pendal Group will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would be a touch cautious of relying on this stock primarily for the dividend income.
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 picked out 3 warning signs for Pendal Group that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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