Nick Scali (ASX:NCK) Is Paying Out A Larger Dividend Than Last Year

Nick Scali Limited (ASX:NCK) has announced that it will be increasing its dividend on the 25th of October to AU$0.25. Based on the announced payment, the dividend yield for the company will be 5.6%, which is fairly typical for the industry.

See our latest analysis for Nick Scali

Nick Scali Doesn't Earn Enough To Cover Its Payments

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Nick Scali's dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to fall by 22.8% over the next year. If the dividend continues along recent trends, we estimate the payout ratio could reach 98%, which could put the dividend in jeopardy if the company's earnings don't improve.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The first annual payment during the last 10 years was AU$0.09 in 2011, and the most recent fiscal year payment was AU$0.65. This means that it has been growing its distributions at 22% per annum over that time. Nick Scali 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

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. Nick Scali has seen EPS rising for the last five years, at 26% per annum. Nick Scali is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.

We Really Like Nick Scali's Dividend

Overall, a dividend increase is always good, and we think that Nick Scali is a strong income stock thanks to its track record and growing earnings. The earnings easily cover the company's distributions, and the company is generating plenty of cash. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. Taking this all into consideration, this looks like it could be a good dividend opportunity.

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. Just as an example, we've come across 2 warning signs for Nick Scali you should be aware of, and 1 of them can't be ignored. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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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.
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