Stock Analysis

Deterra Royalties' (ASX:DRR) Dividend Will Be Increased To AU$0.12

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The board of Deterra Royalties Limited (ASX:DRR) has announced that the dividend on 31st of March will be increased to AU$0.12, which will be 377% higher than last year. Even though the dividend went up, the yield is still quite low at only 5.4%.

View our latest analysis for Deterra Royalties

Deterra Royalties Is Paying Out More Than It Is Earning

Even a low dividend yield can be attractive if it is sustained for years on end. Before making this announcement, Deterra Royalties' dividend was higher than its profits, but the free cash flows quite comfortably covered it. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Earnings per share is forecast to rise by 31.6% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could get very high, which probably can't continue without starting to put some pressure on the balance sheet.

ASX:DRR Historic Dividend February 24th 2022

Deterra Royalties Doesn't Have A Long Payment History

It's not possible for us to make a backward looking judgement just based on a short payment history. This doesn't mean that the company can't pay a good dividend, but just that we want to wait until it can prove itself.

Deterra Royalties Might Find It Hard To Grow Its Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. The business has been going well, which we can see by the fact that EPS has risen by 58% in the last year. It's nice to see earnings per share rising, but one year is too short a period to get excited about. Were this trend to continue, we'd be interested. EPS has been growing well, but Deterra Royalties has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain. Any one year of performance can be misleading for a variety of reasons, so we wouldn't like to form any strong conclusions based on these numbers alone.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Deterra Royalties will make a great income stock. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Deterra Royalties is a great stock to add to your portfolio if income is your focus.

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. Taking the debate a bit further, we've identified 2 warning signs for Deterra Royalties that investors need to be conscious of moving forward. Is Deterra Royalties not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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