Supply Network (ASX:SNL) Is Increasing Its Dividend To A$0.38

Supply Network Limited (ASX:SNL) will increase its dividend on the 2nd of October to A$0.38, which is 15% higher than last year's payment from the same period of A$0.33. Even though the dividend went up, the yield is still quite low at only 1.8%.

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Supply Network's Payment Could Potentially Have Solid Earnings Coverage

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Prior to this announcement, Supply Network's dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 114% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Looking forward, earnings per share is forecast to rise by 59.3% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 61% by next year, which is in a pretty sustainable range.

View our latest analysis for Supply Network

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 2015, the annual payment back then was A$0.09, compared to the most recent full-year payment of A$0.65. This implies that the company grew its distributions at a yearly rate of about 22% 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.

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. Supply Network has seen EPS rising for the last five years, at 32% per annum. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Supply Network hasn't been doing.

Our Thoughts On Supply Network's Dividend

Overall, we always like to see the dividend being raised, but we don't think Supply Network will make a great income stock. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Supply Network that investors should know about before committing capital to this stock. Is Supply Network 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.