Scales' (NZSE:SCL) Dividend Will Be NZ$0.1118

The board of Scales Corporation Limited (NZSE:SCL) has announced that it will pay a dividend on the 7th of July, with investors receiving NZ$0.1118 per share. This means that the annual payment will be 6.1% of the current stock price, which is in line with the average for the industry.

See our latest analysis for Scales

Scales' Earnings Easily Cover The Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. The last dividend made up a very large portion of earnings and also represented 93% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.

EPS is set to grow by 116.0% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 80% which is a bit high but can definitely be sustainable.

Scales Is Still Building Its Track Record

It is great to see that Scales has been paying a stable dividend for a number of years now, however we want to be a bit cautious about whether this will remain true through a full economic cycle. Since 2015, the annual payment back then was NZ$0.10, compared to the most recent full-year payment of NZ$0.19. This implies that the company grew its distributions at a yearly rate of about 8.4% over that duration. Investors will likely want to see a longer track record of growth before making decision to add this to their income portfolio.

Scales May Find It Hard To Grow The Dividend

The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. In the last five years, Scales' earnings per share has shrunk at approximately 4.8% per annum. 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. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

The Dividend Could Prove To Be Unreliable

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Scales' payments, as there could be some issues with sustaining them into the future. The track record isn't great, and the payments are a bit high to be considered sustainable. Overall, we don't think this company has the makings of a good income 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, Scales has 2 warning signs (and 1 which is concerning) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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