Zotefoams (LON:ZTF) Is Paying Out A Larger Dividend Than Last Year

Zotefoams plc (LON:ZTF) has announced that it will be increasing its periodic dividend on the 7th of October to £0.0218, which will be 3.8% higher than last year's comparable payment amount of £0.021. This takes the annual payment to 2.0% of the current stock price, which unfortunately is below what the industry is paying.

See our latest analysis for Zotefoams

Zotefoams' Payment Has Solid Earnings Coverage

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. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.

The next year is set to see EPS grow by 120.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 25%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of £0.049 in 2012 to the most recent total annual payment of £0.065. This implies that the company grew its distributions at a yearly rate of about 2.9% over that duration. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Zotefoams May Find It Hard To Grow The Dividend

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Zotefoams has seen earnings per share falling at 2.1% per year over the last five years. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. 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, we always like to see the dividend being raised, but we don't think Zotefoams will make a great income stock. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Zotefoams has been making. We don't think Zotefoams is a great stock to add to your portfolio if income is your focus.

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. Taking the debate a bit further, we've identified 2 warning signs for Zotefoams that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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