Famous Brands' (JSE:FBR) Dividend Will Be Increased To ZAR2.33

The board of Famous Brands Limited (JSE:FBR) has announced that it will be paying its dividend of ZAR2.33 on the 10th of July, an increased payment from last year's comparable dividend. This takes the annual payment to 7.5% of the current stock price, which is about average for the industry.

View our latest analysis for Famous Brands

Famous Brands' Dividend Is Well Covered By Earnings

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Famous Brands was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. By paying out so much of its cash flows, this could indicate that the company has limited opportunities for investment and growth.

If the trend of the last few years continues, EPS will grow by 89.1% over the next 12 months. If the dividend continues on this path, the payout ratio could be 36% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

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. The annual payment during the last 10 years was ZAR2.50 in 2013, and the most recent fiscal year payment was ZAR4.66. This works out to be a compound annual growth rate (CAGR) of approximately 6.4% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. It's encouraging to see that Famous Brands has been growing its earnings per share at 89% a year over the past five years. The company's earnings per share has grown rapidly in recent years, and it has a good balance between reinvesting and paying dividends to shareholders, so we think that Famous Brands could prove to be a strong dividend payer.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Famous Brands' payments are rock solid. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Famous Brands has been making. 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. Taking the debate a bit further, we've identified 2 warning signs for Famous Brands that investors need to be conscious of moving forward. Is Famous Brands not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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