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The board of Australian Foundation Investment Company Limited (ASX:AFI) has announced that it will pay a dividend on the 31st of August, with investors receiving AU$0.14 per share. This means the dividend yield will be fairly typical at 2.8%.
Australian Foundation Investment Doesn't Earn Enough To Cover Its Payments
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, the company was paying out 124% of what it was earning. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.
Looking forward, EPS could fall by 4.1% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 131%, which is definitely a bit high to be sustainable going forward.
Australian Foundation Investment Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The dividend has gone from AU$0.21 in 2011 to the most recent annual payment of AU$0.24. This means that it has been growing its distributions at 1.3% per annum over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.
Dividend Growth May Be Hard To Achieve
The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. It's not great to see that Australian Foundation Investment's earnings per share has fallen at approximately 4.1% per year over the past five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.
The Dividend Could Prove To Be Unreliable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Australian Foundation Investment's payments, as there could be some issues with sustaining them into the future. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Australian Foundation Investment has 2 warning signs (and 1 which is significant) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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