Duxton Water (ASX:D2O) Has Announced That It Will Be Increasing Its Dividend To A$0.035

The board of Duxton Water Limited (ASX:D2O) has announced that it will be increasing its dividend by 6.1% on the 27th of October to A$0.035, up from last year's comparable payment of A$0.033. This makes the dividend yield 4.3%, which is above the industry average.

See our latest analysis for Duxton Water

Duxton Water Is Paying Out More Than It Is Earning

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. This high of a dividend payment could start to put pressure on the balance sheet in the future.

EPS is set to grow by 11.0% over the next year if recent trends continue. Assuming the dividend continues along recent trends, we think the payout ratio could reach 120%, which probably can't continue without starting to put some pressure on the balance sheet.

Duxton Water Is Still Building Its Track Record

Even though the company has been paying a consistent dividend for a while, we would like to see a few more years before we feel comfortable relying on it. The annual payment during the last 6 years was A$0.023 in 2017, and the most recent fiscal year payment was A$0.07. This means that it has been growing its distributions at 20% per annum over that time. Duxton Water has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Could Be Constrained

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Duxton Water has seen EPS rising for the last five years, at 11% per annum. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.

An additional note is that the company has been raising capital by issuing stock equal to 28% of shares outstanding in the last 12 months. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Duxton Water's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think Duxton Water will make a great income stock. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular 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 4 warning signs for Duxton Water you should be aware of, and 2 of them make us uncomfortable. Is Duxton Water not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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