ASX Limited's (ASX:ASX) dividend is being reduced to AU$1.11 on the 29th of September. The dividend yield will be in the average range for the industry at 2.6%.
ASX's Earnings Easily Cover the Distributions
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important. Before this announcement, ASX was paying out 95% of earnings, but a comparatively small 8.7% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
Earnings per share is forecast to rise by 3.1% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 92%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.
ASX 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. Since 2011, the first annual payment was AU$1.74, compared to the most recent full-year payment of AU$2.24. This means that it has been growing its distributions at 2.5% per annum over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.
Dividend Growth May Be Hard To Achieve
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Earnings have grown at around 2.4% a year for the past five years, which isn't massive but still better than seeing them shrink. ASX's earnings per share has barely grown, which is not ideal - perhaps this is why the company pays out the majority of its earnings to shareholders. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.
Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. The company has been bring in plenty of cash to cover the dividend, but we don't necessarily think that makes it a great dividend stock. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for ASX that you should be aware of before investing. 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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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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