Renishaw (LON:RSW) Will Pay A Larger Dividend Than Last Year At £0.168

Renishaw plc (LON:RSW) has announced that it will be increasing its periodic dividend on the 11th of April to £0.168, which will be 5.0% higher than last year's comparable payment amount of £0.16. This makes the dividend yield 1.8%, which is above the industry average.

View our latest analysis for Renishaw

Renishaw's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last dividend, Renishaw is earning enough to cover the payment, but then it makes up 182% of cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

The next year is set to see EPS grow by 30.4%. If the dividend continues on this path, the payout ratio could be 37% by next year, which we think can be pretty sustainable going forward.

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 annual payment during the last 10 years was £0.385 in 2013, and the most recent fiscal year payment was £0.726. This works out to be a compound annual growth rate (CAGR) of approximately 6.5% a year over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

The Dividend's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's not great to see that Renishaw's earnings per share has fallen at approximately 3.3% per year over the past five years. 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. 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.

Renishaw's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Renishaw's payments are rock solid. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would probably look elsewhere for an income investment.

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. Without at least some growth in earnings per share over time, the dividend will eventually come under pressure either from competition or inflation. See if the 5 analysts are forecasting a turnaround in our free collection of analyst estimates here. Is Renishaw not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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