Codan Limited (ASX:CDA) has announced that on 7th of September, it will be paying a dividend ofA$0.15, which a reduction from last year's comparable dividend. The dividend yield of 3.9% is still a nice boost to shareholder returns, despite the cut.
Codan's Payment Has Solid Earnings Coverage
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. The last payment was quite easily covered by earnings, but it made up 288% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.
Over the next year, EPS is forecast to expand by 21.1%. If the dividend continues on this path, the payout ratio could be 54% by next year, which we think can be pretty sustainable going forward.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was A$0.095 in 2012, and the most recent fiscal year payment was A$0.28. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. Codan has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.
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. Codan has impressed us by growing EPS at 18% per year over the past five years. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.
Our Thoughts On Codan's Dividend
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.
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, Codan has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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