ARB (ASX:ARB) Is Reducing Its Dividend To AU$0.39

ARB Corporation Limited (ASX:ARB) is reducing its dividend to AU$0.39 on the 22nd of October. This payment takes the dividend yield to 1.4%, which only provides a modest boost to overall returns.

See our latest analysis for ARB

ARB's Earnings Easily Cover the Distributions

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, ARB's dividend was only 49% of earnings, however it was paying out 96% of free cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

EPS is set to fall by 4.6% over the next 12 months. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 56%, which is comfortable for the company to continue in the future.

ARB 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 first annual payment during the last 10 years was AU$0.23 in 2011, and the most recent fiscal year payment was AU$0.78. This implies that the company grew its distributions at a yearly rate of about 13% over that duration. So, dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.

The Dividend Looks Likely To Grow

Investors could be attracted to the stock based on the quality of its payment history. It's encouraging to see ARB has been growing its earnings per share at 18% a 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 ARB's Dividend

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While ARB is earning enough to cover the payments, the cash flows are lacking. We don't think ARB is a great stock to add to your portfolio if income is your focus.

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. Taking the debate a bit further, we've identified 1 warning sign for ARB that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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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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