Beach Energy Limited (ASX:BPT) will pay a dividend of AU$0.01 on the 30th of September. This payment means that the dividend yield will be 1.8%, which is around the industry average.
Beach Energy's Earnings Easily Cover the Distributions
We aren't too impressed by dividend yields unless they can be sustained over time. Based on the last payment, Beach Energy was earning enough to cover the dividend, but free cash flows weren't positive. We think that cash flows should take priority over earnings, so this is definitely a worry for the dividend going forward.
Looking forward, earnings per share is forecast to fall by 0.4% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 14%, which we are pretty comfortable with and we think is feasible on an earnings basis.
Although the company has a long dividend history, it has been cut at least once in the last 10 years. Since 2011, the dividend has gone from AU$0.018 to AU$0.02. This means that it has been growing its distributions at 1.3% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
The Dividend Looks Likely To Grow
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Beach Energy has grown earnings per share at 56% per 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 Beach Energy's Dividend
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.
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. Taking the debate a bit further, we've identified 1 warning sign for Beach Energy that investors need to be conscious of moving forward. We have also put together a list of global stocks with a solid dividend.
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