Deterra Royalties (ASX:DRR) Is Reducing Its Dividend To A$0.1685

Deterra Royalties Limited (ASX:DRR) is reducing its dividend from last year's comparable payment to A$0.1685 on the 19th of September. This means that the annual payment will be 6.4% of the current stock price, which is in line with the average for the industry.

Check out our latest analysis for Deterra Royalties

Deterra Royalties 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 higher than its profits, and made up 84% of cash flows. This indicates that the company could be more focused on returning cash to shareholders than reinvesting to grow the business.

Looking forward, earnings per share is forecast to fall by 14.2% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 117%, which could put the dividend in jeopardy if the company's earnings don't improve.

Deterra Royalties' Dividend Has Lacked Consistency

Looking back, the company hasn't been paying the most consistent dividend, but with such a short dividend history it could be too early to draw solid conclusions. The dividend has gone from an annual total of A$0.049 in 2021 to the most recent total annual payment of A$0.289. This implies that the company grew its distributions at a yearly rate of about 143% over that duration. Deterra Royalties has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Deterra Royalties' Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Deterra Royalties has seen EPS rising for the last three years, at 37% per annum. Although earnings per share is up nicely Deterra Royalties is paying out 100% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

Deterra Royalties' 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 we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. Overall, we don't think this company has the makings of a good income stock.

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. Just as an example, we've come across 2 warning signs for Deterra Royalties you should be aware of, and 1 of them is a bit unpleasant. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.