The board of Cedar Woods Properties Limited (ASX:CWP) has announced that it will be paying its dividend of A$0.145 on the 28th of October, an increased payment from last year's comparable dividend. This makes the dividend yield 6.1%, which is above the industry average.
Cedar Woods Properties' Earnings Easily Cover The Distributions
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Cedar Woods Properties was earning enough to cover the dividend, but it wasn't generating any free cash flows. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.
Looking forward, earnings per share is forecast to rise by 4.4% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 56% by next year, which is in a pretty sustainable range.
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2012, the annual payment back then was A$0.25, compared to the most recent full-year payment of A$0.275. Its dividends have grown at less than 1% per annum over this time frame. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.
Cedar Woods Properties May Find It Hard To Grow The Dividend
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. Over the past five years, it looks as though Cedar Woods Properties' EPS has declined at around 4.6% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.
The Dividend Could Prove To Be Unreliable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While Cedar Woods Properties is earning enough to cover the payments, the cash flows are lacking. We don't think Cedar Woods Properties is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Case in point: We've spotted 2 warning signs for Cedar Woods Properties (of which 1 is concerning!) you should know about. 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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