Redde Northgate (LON:REDD) Will Pay A Larger Dividend Than Last Year At £0.165

Redde Northgate plc's (LON:REDD) dividend will be increasing from last year's payment of the same period to £0.165 on 29th of September. This will take the annual payment to 7.0% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for Redde Northgate

Redde Northgate's Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. However, prior to this announcement, Redde Northgate's dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.

Looking forward, earnings per share is forecast to fall by 41.5% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could be 71%, which we are pretty comfortable with and we think is feasible on an earnings basis.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was £0.026 in 2013, and the most recent fiscal year payment was £0.24. This works out to be a compound annual growth rate (CAGR) of approximately 25% a year over that time. Redde Northgate has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Redde Northgate has been growing its earnings per share at 14% a year over the past five years. Redde Northgate definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

We Really Like Redde Northgate's Dividend

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The earnings easily cover the company's distributions, and the company is generating plenty of cash. We should point out that the earnings are expected to fall over the next 12 months, which won't be a problem if this doesn't become a trend, but could cause some turbulence in the next year. All of these factors considered, we think this has solid potential as a dividend stock.

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. To that end, Redde Northgate has 3 warning signs (and 2 which are potentially serious) we think you should know about. Is Redde Northgate 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.