Caledonia Investments (LON:CLDN) Is Increasing Its Dividend To UK£2.22

Caledonia Investments plc (LON:CLDN) will increase its dividend on the 4th of August to UK£2.22. This takes the dividend yield from 1.7% to 6.4%, which shareholders will be pleased with.

View our latest analysis for Caledonia Investments

Caledonia Investments' Earnings Easily Cover the Distributions

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Caledonia Investments was paying a whopping 99% as a dividend, but this only made up 5.8% of its overall earnings. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Over the next year, EPS could expand by 16.4% if recent trends continue. If the dividend continues on this path, the payout ratio could be 19% by next year, which we think can be pretty sustainable going forward.

Caledonia Investments Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2012, the first annual payment was UK£0.43, compared to the most recent full-year payment of UK£0.65. This works out to be a compound annual growth rate (CAGR) of approximately 4.2% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. We are encouraged to see that Caledonia Investments has grown earnings per share at 16% per year over the past five years. Caledonia Investments definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Our Thoughts On Caledonia Investments' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Caledonia Investments' payments are rock solid. While Caledonia Investments is earning enough to cover the payments, the cash flows are lacking. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 1 warning sign for Caledonia Investments that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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