The next dividend payment for the Class will be AU $ 0.025 per share, on the back of last year, when the company paid shareholders a total of AU $ 0.05. Based on last year’s payments, class shares have a final return of approximately 2.7% of the current share price of $ 1.83. Dividends are an important source of income for many shareholders, but the health of the company is critical to maintaining those dividends. So we need to investigate whether Class can afford his dividend and whether the dividend could grow.
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Dividends are generally paid out of the company’s earnings. If a company pays more dividends than it earns, then the dividend may be unsustainable. Last year it distributed 76% of its earnings as dividends, which is not unreasonable, but limits reinvestment in the business and makes the dividend vulnerable to a business downturn. It could become a problem if profits began to decline. However, cash flow is typically more important than profit to assess dividend sustainability, so we should always check whether the company has generated enough liquidity to afford its dividend. Last year, dividends absorbed 74% of the company’s free cash flow, which falls within a normal range for most organizations that pay dividends.
It is good to see that the Class dividend is covered by both profits and cash flows, since this is generally a sign that the dividend is sustainable and a lower payment ratio usually suggests a higher safety margin before the dividend is cut.
Click here to view the company’s payment report, plus analyst estimates of its future dividends.
ASX: historic dividend yield CL1, 22 February 2020
Are earnings and dividends growing?
Shares of companies that generate sustainable earnings growth often offer the best dividend prospects, as it is easier to raise the dividend when earnings are increasing. If business enters a recession and the dividend is reduced, the company may see its value plummet. For this reason, we are delighted to see that Class earnings per share have increased by 12% per year over the past five years. The company has paid most of its profits as dividends over the past year, although the business is booming and earnings per share are growing rapidly. Higher earnings generally promote growing dividends well, although with seemingly strong growth prospects we wonder why management is not reinvesting more in the business.
The main way in which most investors will evaluate a company’s dividend outlook is by checking the historical rate of dividend growth. Over the past four years, Class has increased the dividend by approximately 5.7% per year on average. It’s nice to see both earnings and dividends have improved, although the former grew much faster than the latter, probably due to the fact that the company reinvested its growing profits more.
The bottom line
From a dividend perspective, should investors buy or avoid the Class? Higher earnings per share generally lead to higher dividends from stocks that pay dividends in the long run. However, we will also note that Class is paying more than half of its earnings and its cash flow as profits, which could limit dividend growth if earnings growth slows down. Although it has some positive things, we are a bit ambivalent and it would take more to convince us of the merits of Class dividends.