The board of Argo Investments Limited (ASX:ARG) has announced that it will be paying its dividend of A$0.18 on the 15th of September, an increased payment from last year's comparable dividend. Based on this payment, the dividend yield for the company will be 3.8%, which is fairly typical for the industry.
Argo Investments Is Paying Out More Than It Is Earning
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, the company was paying out 96% of what it was earning. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.
Earnings per share could rise by 2.8% over the next year if things go the same way as they have for the last few years. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 95% over the next year.
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of A$0.265 in 2013 to the most recent total annual payment of A$0.345. This implies that the company grew its distributions at a yearly rate of about 2.7% over that duration. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.
Dividend Growth May Be Hard To Achieve
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. Earnings per share has been crawling upwards at 2.8% per year. So the company has struggled to grow its EPS yet it's still paying out 96% of its earnings. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.
Argo Investments' Dividend Doesn't Look Sustainable
In summary, while it's always good to see the dividend being raised, we don't think Argo Investments' payments are rock solid. The payments are bit high to be considered sustainable, and the track record isn't the best. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. 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 Argo Investments that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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