Aurizon Holdings' (ASX:AZJ) Dividend Is Being Reduced To A$0.109

Aurizon Holdings Limited (ASX:AZJ) has announced that on 21st of September, it will be paying a dividend ofA$0.109, which a reduction from last year's comparable dividend. The dividend yield of 5.5% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Aurizon Holdings

Aurizon Holdings' Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Before this announcement, Aurizon Holdings was paying out 77% of earnings, but a comparatively small 50% of free cash flows. This leaves plenty of cash for reinvestment into the business.

The next year is set to see EPS grow by 9.7%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 71% which brings it into quite a comfortable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of A$0.037 in 2012 to the most recent total annual payment of A$0.214. This implies that the company grew its distributions at a yearly rate of about 19% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

Dividend Growth Could Be Constrained

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Aurizon Holdings has grown earnings per share at 22% per year over the past five years. EPS is growing rapidly, although the company is also paying out a large portion of its profits as dividends. If earnings keep growing, the dividend may be sustainable, but generally we'd prefer to see a fast growing company reinvest in further growth.

In Summary

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Aurizon Holdings that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.