Australian Finance Group (ASX:AFG) Is Increasing Its Dividend To A$0.096

The board of Australian Finance Group Limited (ASX:AFG) has announced that it will be paying its dividend of A$0.096 on the 22nd of September, an increased payment from last year's comparable dividend. This takes the dividend yield to 8.5%, which shareholders will be pleased with.

View our latest analysis for Australian Finance Group

Australian Finance Group's Dividend Forecasted To Be Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable.

Having paid out dividends for 7 years, Australian Finance Group has a good history of paying out a part of its earnings to shareholders. Despite this history however, Australian Finance Group's latest earnings report actually shows that the company didn't have enough earnings to cover its dividends, paying out more than it earned. This is worrying for investors of Australian Finance Group, as it points towards the dividends being unsustainable in the long term.

Looking forward, EPS is forecast to rise by 77.2% over the next 3 years. Despite the current payout ratio being slightly elevated, analysts estimate the future payout ratio will be 72% over the same time period, which would make us comfortable with the sustainability of the dividend.

Australian Finance Group's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2015, the annual payment back then was A$0.0426, compared to the most recent full-year payment of A$0.166. This works out to be a compound annual growth rate (CAGR) of approximately 21% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend's Growth Prospects Are Limited

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. It's not great to see that Australian Finance Group's earnings per share has fallen at approximately 4.5% per year over the past five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Australian Finance Group will make a great income stock. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 3 warning signs for Australian Finance Group that investors need to be conscious of moving forward. Is Australian Finance Group not quite the opportunity you were looking for? Why not check out our selection of top 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.