The board of Zotefoams plc (LON:ZTF) has announced that it will be increasing its dividend by 3.8% on the 7th of October to £0.0218, up from last year's comparable payment of £0.021. Even though the dividend went up, the yield is still quite low at only 2.2%.
Check out our latest analysis for Zotefoams
Zotefoams' Dividend Is Well Covered By Earnings
It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Zotefoams was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. By paying out so much of its cash flows, this could indicate that the company has limited opportunities for investment and growth.
Looking forward, earnings per share is forecast to rise by 120.1% over the next year. If the dividend continues on this path, the payout ratio could be 25% 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 dividend has gone from £0.049 total annually to £0.0658. This implies that the company grew its distributions at a yearly rate of about 3.0% over that duration. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.
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. Over the past five years, it looks as though Zotefoams' EPS has declined at around 2.1% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this can turn into a longer term trend.
In Summary
Overall, we always like to see the dividend being raised, but we don't think Zotefoams will make a great income stock. While Zotefoams is earning enough to cover the dividend, we are generally unimpressed with its future prospects. Overall, we don't think this company has the makings of a good income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 3 warning signs for Zotefoams that investors should take into consideration. 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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About LSE:ZTF
Zotefoams
Manufactures, distributes, and sells polyolefin block foams in the United Kingdom, rest of Europe, North America, and internationally.
Excellent balance sheet with reasonable growth potential.