Australian Foundation Investment (ASX:AFI) Will Pay A Dividend Of A$0.115

The board of Australian Foundation Investment Company Limited (ASX:AFI) has announced that it will pay a dividend of A$0.115 per share on the 26th of February. This makes the dividend yield about the same as the industry average at 3.3%.

View our latest analysis for Australian Foundation Investment

Australian Foundation Investment Doesn't Earn Enough To Cover Its Payments

We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Prior to this announcement, the company was paying out 107% of what it was earning. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

If the company can't turn things around, EPS could fall by 5.9% over the next year. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 115%, which is definitely a bit high to be sustainable going forward.

Australian Foundation Investment Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The annual payment during the last 10 years was A$0.22 in 2014, and the most recent fiscal year payment was A$0.25. This means that it has been growing its distributions at 1.3% per annum over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Dividend Growth May Be Hard To Come By

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Unfortunately things aren't as good as they seem. In the last five years, Australian Foundation Investment's earnings per share has shrunk at approximately 5.9% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.

Australian Foundation Investment's Dividend Doesn't Look Sustainable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. 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. For example, we've picked out 2 warning signs for Australian Foundation Investment that investors should know about before committing capital to this stock. Is Australian Foundation Investment not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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