DS Smith's (LON:SMDS) Upcoming Dividend Will Be Larger Than Last Year's

DS Smith Plc (LON:SMDS) will increase its dividend from last year's comparable payment on the 1st of November to £0.102. This takes the dividend yield to 5.7%, which shareholders will be pleased with.

Check out our latest analysis for DS Smith

DS Smith's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, DS Smith's dividend made up quite a large proportion of earnings but only 42% of free cash flows. This leaves plenty of cash for reinvestment into the business.

The next year is set to see EPS grow by 41.9%. If the dividend continues on this path, the payout ratio could be 52% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the annual payment back then was £0.059, compared to the most recent full-year payment of £0.15. This means that it has been growing its distributions at 9.8% per annum over that time. 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 evaluate if earnings per share is growing, which could point to a growing dividend in the future. Unfortunately, DS Smith's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year.

Our Thoughts On DS Smith's Dividend

In summary, while it's always good to see the dividend being raised, we don't think DS Smith's payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 1 warning sign for DS Smith that investors should know about before committing capital to this stock. Is DS Smith not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.