The board of Argo Investments Limited (ASX:ARG) has announced that it will pay a dividend of AU$0.14 per share on the 17th of September. This means that the annual payment will be 2.9% of the current stock price, which is in line with the average for the industry.
Argo Investments Is Paying Out More Than It Is Earning
Unless the payments are sustainable, the dividend yield doesn't mean too much. Before making this announcement, the company's dividend was much higher than its earnings. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.
Looking forward, EPS could fall by 10.4% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 153%, which is definitely a bit high to be sustainable going forward.
Argo Investments Has A Solid Track Record
The company has an extended history of paying stable dividends. The first annual payment during the last 10 years was AU$0.26 in 2011, and the most recent fiscal year payment was AU$0.28. Its dividends have grown at less than 1% per annum over this time frame. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.
The Dividend Has Limited Growth Potential
Investors could be attracted to the stock based on the quality of its payment history. However, initial appearances might be deceiving. Over the past five years, it looks as though Argo Investments' EPS has declined at around 10% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future.
Argo Investments' Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We don't think Argo Investments 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Argo Investments has 3 warning signs (and 1 which can't be ignored) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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