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The board of GWA Group Limited (ASX:GWA) has announced that it will be increasing its dividend on the 6th of October to AU$0.065. This takes the dividend yield from 4.5% to 4.5%, which shareholders will be pleased with.
GWA Group's Payment Has Solid Earnings Coverage
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. The last payment made up 94% of earnings, but cash flows were much higher. This leaves plenty of cash for reinvestment into the business.
Earnings per share is forecast to rise by 21.7% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 83%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from AU$0.20 in 2011 to the most recent annual payment of AU$0.13. Doing the maths, this is a decline of about 4.5% per year. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.
Dividend Growth May Be Hard To Come By
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. GWA Group has seen earnings per share falling at 7.0% 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. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.
In summary, while it's always good to see the dividend being raised, we don't think GWA Group's payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for GWA Group that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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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