ASX's (ASX:ASX) Dividend Will Be Reduced To A$1.12

ASX Limited's (ASX:ASX) dividend is being reduced from last year's payment covering the same period to A$1.12 on the 27th of September. However, the dividend yield of 4.0% still remains in a typical range for the industry.

Check out our latest analysis for ASX

ASX's Payment Has Solid Earnings Coverage

Solid dividend yields are great, but they only really help us if the payment is sustainable. Prior to this announcement, the dividend made up 139% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

Over the next year, EPS is forecast to expand by 66.0%. If the dividend continues along recent trends, we estimate the payout ratio could reach 87%, which is on the higher side, but certainly still feasible.

ASX Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from an annual total of A$1.73 in 2013 to the most recent total annual payment of A$2.28. This implies that the company grew its distributions at a yearly rate of about 2.8% over that duration. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Dividend Growth Is Doubtful

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, initial appearances might be deceiving. In the last five years, ASX's earnings per share has shrunk at approximately 6.6% per annum. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.

ASX's Dividend Doesn't Look Sustainable

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While the current distribution levels might be a bit unsustainable, we can't deny that until now it has been very stable. We don't think ASX 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, ASX has 2 warning signs (and 1 which is a bit concerning) we think you should know about. Is ASX 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.