DS Smith (LON:SMDS) Is Increasing Its Dividend To UK£0.048

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 3.2% to 3.4%, 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. Before this announcement, DS Smith was paying out 73% of earnings, but a comparatively small 40% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS is forecast to expand by 43.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 50%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from UK£0.065 to UK£0.12. This implies that the company grew its distributions at a yearly rate of about 6.4% over that duration. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. DS Smith might have put its house in order since then, but we remain cautious.

Dividend Growth May Be Hard To Achieve

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. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Our Thoughts On DS Smith's Dividend

Overall, we always like to see the dividend being raised, but we don't think DS Smith will make a great income stock. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would be a touch cautious of relying on this stock primarily for the dividend income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. 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 DS Smith that investors should know about before committing capital to this stock. We have also put together a list of global stocks with a solid dividend.

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