Karooooo's (NASDAQ:KARO) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Karooooo Ltd. (NASDAQ:KARO) has announced that it will be paying its dividend of ZAR1.25 on the 22nd of August, an increased payment from last year's comparable dividend. This takes the dividend yield to 2.7%, which shareholders will be pleased with.

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Karooooo's Payment Could Potentially Have Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Karooooo was paying out quite a large proportion of both earnings and cash flow, with the dividend being 103% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

The next year is set to see EPS grow by 40.0%. If the dividend continues on this path, the payout ratio could be 3.6% by next year, which we think can be pretty sustainable going forward.

Check out our latest analysis for Karooooo

Karooooo Doesn't Have A Long Payment History

Looking back, the dividend has been stable, but the company hasn't been paying a dividend for very long so we can't be confident that the dividend will remain stable through all economic environments. The dividend has gone from an annual total of ZAR8.26 in 2021 to the most recent total annual payment of ZAR21.9. This implies that the company grew its distributions at a yearly rate of about 28% over that duration. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. Karooooo has seen EPS rising for the last five years, at 17% per annum. The payout ratio is very much on the higher end, which could mean that the growth rate will slow down in the future, and that could flow through to the dividend as well.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

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. Taking the debate a bit further, we've identified 2 warning signs for Karooooo that investors need to be conscious of moving forward. Is Karooooo 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.