Incitec Pivot (ASX:IPL) Is Paying Out A Larger Dividend Than Last Year

Incitec Pivot Limited (ASX:IPL) will increase its dividend from last year's comparable payment on the 21st of December to A$0.17. This will take the dividend yield to an attractive 8.5%, providing a nice boost to shareholder returns.

Our analysis indicates that IPL is potentially undervalued!

Incitec Pivot Doesn't Earn Enough To Cover Its Payments

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment was quite easily covered by earnings, but it made up 100% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS is forecast to fall by 47.0%. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 104%, which is definitely a bit high to be sustainable going forward.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the annual payment back then was A$0.115, compared to the most recent full-year payment of A$0.34. This implies that the company grew its distributions at a yearly rate of about 11% over that duration. Incitec Pivot 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.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see that Incitec Pivot has been growing its earnings per share at 23% a year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Incitec Pivot's payments are rock solid. While Incitec Pivot is earning enough to cover the payments, the cash flows are lacking. 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. 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 Incitec Pivot you should be aware of, and 1 of them is a bit concerning. If you are a dividend investor, you might also want to look at our curated list of high yield 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.