IGO's (ASX:IGO) Shareholders Will Receive A Bigger Dividend Than Last Year

IGO Limited (ASX:IGO) has announced that it will be increasing its dividend from last year's comparable payment on the 28th of September to A$0.60. The payment will take the dividend yield to 6.4%, which is in line with the average for the industry.

View our latest analysis for IGO

IGO's Earnings Easily Cover The Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, IGO's dividend made up quite a large proportion of earnings but only 61% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

Looking forward, earnings per share is forecast to rise by 107.0% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 60% which brings it into quite a comfortable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of A$0.02 in 2013 to the most recent total annual payment of A$0.88. This implies that the company grew its distributions at a yearly rate of about 46% over that duration. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

Dividend Growth Could Be Constrained

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. It's encouraging to see that IGO has been growing its earnings per share at 52% a year over the past five years. However, IGO isn't reinvesting a lot back into the business, so we wonder how quickly it will be able to grow in the future.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think IGO's payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. We would probably look elsewhere for an income investment.

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. As an example, we've identified 2 warning signs for IGO that you should be aware of before investing. 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.