Rathbone Brothers (LON:RAT) Is Paying Out A Larger Dividend Than Last Year

The board of Rathbone Brothers Plc (LON:RAT) has announced that it will be increasing its dividend on the 5th of October to UK£0.27. This will take the dividend yield from 3.9% to 3.9%, providing a nice boost to shareholder returns.

View our latest analysis for Rathbone Brothers

Rathbone Brothers' Payment Has Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, Rathbone Brothers was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. We think that this practice can make the dividend quite risky in the future.

Over the next year, EPS is forecast to expand by 45.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 64%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Rathbone Brothers Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The dividend has gone from UK£0.44 in 2011 to the most recent annual payment of UK£0.74. This means that it has been growing its distributions at 5.3% per annum over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

The Dividend's Growth Prospects Are Limited

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately, Rathbone Brothers' earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

Rathbone Brothers' Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Rathbone Brothers' payments are rock solid. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic 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 2 warning signs for Rathbone Brothers you should be aware of, and 1 of them is concerning. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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