The board of DS Smith Plc (LON:SMDS) has announced that it will be increasing its dividend by 20% on the 3rd of May to UK£0.048. This takes the dividend yield from 3.1% to 3.3%, which shareholders will be pleased with.
View our latest analysis for DS Smith
DS Smith's Earnings Easily Cover the Distributions
If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment made up 91% of earnings, but cash flows were much higher. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Over the next year, EPS is forecast to expand by 68.7%. If the dividend continues along recent trends, we estimate the payout ratio will be 42%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The dividend has gone from UK£0.065 in 2011 to the most recent annual payment of UK£0.12. This means that it has been growing its distributions at 6.4% per annum over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.
The Dividend's Growth Prospects Are Limited
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though DS Smith's EPS has declined at around 4.7% a year. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.
In Summary
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. 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. This company is not in the top tier of income providing stocks.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for DS Smith that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our curated list 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.
About LSE:SMDS
DS Smith
Provides packaging solutions, paper products, and recycling services worldwide.
Fair value second-rate dividend payer.
