Step One Clothing (ASX:STP) Is Increasing Its Dividend To A$0.044

Step One Clothing Limited's (ASX:STP) periodic dividend will be increasing on the 14th of March to A$0.044, with investors receiving 10.0% more than last year's A$0.04. This will take the dividend yield to an attractive 6.5%, providing a nice boost to shareholder returns.

Check out our latest analysis for Step One Clothing

Step One Clothing's Payment Could Potentially Have Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. But before making this announcement, Step One Clothing's earnings quite easily covered the dividend. However, with more than 75% of free cash flow being paid out to shareholders, future growth could potentially be constrained.

Earnings per share is forecast to rise by 32.1% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 81% - on the higher side, but we wouldn't necessarily say this is unsustainable.

Step One Clothing Doesn't Have A Long Payment History

It's not possible for us to make a backward looking judgement just based on a short payment history. This doesn't mean that the company can't pay a good dividend, but just that we want to wait until it can prove itself.

The Dividend Looks Likely To Grow

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Step One Clothing has impressed us by growing EPS at 86% per year over the past three years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Step One Clothing that investors should take into consideration. Is Step One Clothing 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.