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

Redde Northgate plc (LON:REDD) has announced that it will be increasing its dividend from last year's comparable payment on the 29th of September to £0.165. This makes the dividend yield 7.3%, which is above the industry average.

View our latest analysis for Redde Northgate

Redde Northgate's Payment Has Solid Earnings Coverage

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. However, prior to this announcement, Redde Northgate's dividend was comfortably covered by both cash flow and earnings. This means that most of its earnings are being retained to grow the business.

EPS is set to fall by 48.7% over the next 12 months. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 81%, meaning that most of the company's earnings are being paid out to shareholders.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. 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. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Redde Northgate has seen EPS rising for the last five years, at 14% per annum. Redde Northgate definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Redde Northgate Looks Like A Great Dividend Stock

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The company is generating plenty of cash, and the earnings also quite easily cover the distributions. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All in all, this checks a lot of the boxes we look for when choosing an income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 3 warning signs for Redde Northgate (of which 2 make us uncomfortable!) 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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