Kaap Agri (JSE:KAL) Is Increasing Its Dividend To ZAR1.22

Kaap Agri Limited's (JSE:KAL) dividend will be increasing from last year's payment of the same period to ZAR1.22 on 20th of February. This will take the annual payment to 3.8% of the stock price, which is above what most companies in the industry pay.

Our analysis indicates that KAL is potentially undervalued!

Kaap Agri's Payment Has Solid Earnings Coverage

A big dividend yield for a few years doesn't mean much if it can't be sustained. Kaap Agri is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. With the company not bringing in any cash, paying out to shareholders is bound to become difficult at some point.

Looking forward, earnings per share could rise by 10.5% over the next year if the trend from the last few years continues. If the dividend continues on this path, the payout ratio could be 29% by next year, which we think can be pretty sustainable going forward.

Kaap Agri's Dividend Has Lacked Consistency

It's comforting to see that Kaap Agri has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. Since 2017, the dividend has gone from ZAR0.826 total annually to ZAR1.68. This means that it has been growing its distributions at 15% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Kaap Agri has grown earnings per share at 10% per year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

Our Thoughts On Kaap Agri's Dividend

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 2 warning signs for Kaap Agri (1 doesn't sit too well with us!) that you should be aware of before investing. 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.