DRDGOLD Limited's (NYSE:DRD) dividend is being reduced from last year's payment covering the same period to ZAR0.1801 on the 6th of October. The dividend yield of 6.6% is still a nice boost to shareholder returns, despite the cut.
DRDGOLD's Payment Has Solid Earnings Coverage
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, DRDGOLD's dividend was comfortably covered by both cash flow and earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
If the trend of the last few years continues, EPS will grow by 59.8% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 1.9%, which is in the range that makes us comfortable with the sustainability of the dividend.
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. Since 2012, the annual payment back then was ZAR1.00, compared to the most recent full-year payment of ZAR6.00. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year over that time. DRDGOLD 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. DRDGOLD has impressed us by growing EPS at 60% per year over the past five years. DRDGOLD is clearly able to grow rapidly while still returning cash to shareholders, positioning it to become a strong dividend payer in the future.
We Really Like DRDGOLD's Dividend
It is generally not great to see the dividend being cut, but we don't think this should happen much if at all in the future given that DRDGOLD has the makings of a solid income stock moving forward. By reducing the dividend, pressure will be taken off the balance sheet, which could help the dividend to be consistent in the future. Taking this all into consideration, this looks like it could be a good dividend opportunity.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for DRDGOLD (of which 1 is a bit unpleasant!) you should know about. 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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DRDGOLD Limited, a gold mining company, engages in the surface gold tailings retreatment business in South Africa.
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Flawless balance sheet established dividend payer.