Solution Dynamics' (NZSE:SDL) Upcoming Dividend Will Be Larger Than Last Year's

Solution Dynamics Limited (NZSE:SDL) has announced that it will be increasing its dividend on the 8th of April to NZ$0.09, which will be 29% higher than last year. This takes the dividend yield from 4.1% to 4.8%, which shareholders will be pleased with.

Check out our latest analysis for Solution Dynamics

Solution Dynamics Doesn't Earn Enough To Cover Its Payments

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last dividend made up a very large portion of earnings and also represented 87% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.

EPS is set to grow by 14.0% over the next year if recent trends continue. However, if the dividend continues growing along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 95% over the next year.

Solution Dynamics' Dividend Has Lacked Consistency

It's comforting to see that Solution Dynamics has been paying a dividend for a number of years now, however it has been cut at least once in that time. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2015, the first annual payment was NZ$0.015, compared to the most recent full-year payment of NZ$0.11. This implies that the company grew its distributions at a yearly rate of about 33% over that duration. 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.

Solution Dynamics' Dividend Might Lack Growth

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see Solution Dynamics has been growing its earnings per share at 14% a year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.

Our Thoughts On Solution Dynamics' Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 3 warning signs for Solution Dynamics that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield 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.