Austal (ASX:ASB) Is Paying Out A Dividend Of A$0.04

The board of Austal Limited (ASX:ASB) has announced that it will pay a dividend on the 13th of October, with investors receiving A$0.04 per share. This makes the dividend yield 3.1%, which will augment investor returns quite nicely.

View our latest analysis for Austal

Austal's Earnings Easily Cover The Distributions

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, Austal was earning enough to cover the dividend, but free cash flows weren't positive. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

EPS is set to fall by 27.9% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could be 57%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Austal's Dividend Has Lacked Consistency

It's comforting to see that Austal has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The dividend has gone from an annual total of A$0.02 in 2014 to the most recent total annual payment of A$0.08. This means that it has been growing its distributions at 19% per annum over that time. Austal 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

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 encouraging to see that Austal has been growing its earnings per share at 38% a year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.

Our Thoughts On Austal's Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Austal's payments, as there could be some issues with sustaining them into the future. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 3 warning signs for Austal you should be aware of, and 2 of them are potentially serious. Is Austal not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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