Iluka Resources (ASX:ILU) Is Reducing Its Dividend To A$0.03

The board of Iluka Resources Limited (ASX:ILU) has announced it will be reducing its dividend by 88% from last year's payment of A$0.25 on the 27th of September, with shareholders receiving A$0.03. Despite the cut, the dividend yield of 5.6% will still be comparable to other companies in the industry.

Check out our latest analysis for Iluka Resources

Iluka Resources' Earnings Easily Cover The Distributions

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Based on the last payment, Iluka Resources was paying only paying out a fraction of earnings, but the payment was a massive 605% of cash flows. A cash payout ratio this high could put the dividend under pressure and force the company to reduce it in the future if it were to run into tough times.

Looking forward, earnings per share is forecast to fall by 11.6% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could be 26%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the dividend has gone from A$0.35 total annually to A$0.45. This works out to be a compound annual growth rate (CAGR) of approximately 2.5% a year over that time. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

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. Iluka Resources has seen EPS rising for the last five years, at 64% per annum. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.

In Summary

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Iluka Resources is earning enough to cover the payments, the cash flows are lacking. We don't think Iluka Resources 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, Iluka Resources has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about. Is Iluka Resources 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.