Tiger Brands (JSE:TBS) Will Pay A Dividend Of ZAR3.20

The board of Tiger Brands Limited (JSE:TBS) has announced that it will pay a dividend on the 10th of July, with investors receiving ZAR3.20 per share. This means the dividend yield will be fairly typical at 6.4%.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Tiger Brands' stock price has reduced by 32% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.

Check out our latest analysis for Tiger Brands

Tiger Brands' Payment Has Solid Earnings Coverage

Solid dividend yields are great, but they only really help us if the payment is sustainable. Prior to this announcement, Tiger Brands' dividend was only 54% of earnings, however it was paying out 274% of free cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

The next year is set to see EPS grow by 8.1%. If the dividend continues on this path, the payout ratio could be 49% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was ZAR8.50 in 2013, and the most recent fiscal year payment was ZAR9.73. This implies that the company grew its distributions at a yearly rate of about 1.4% over that duration. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

Dividend Growth May Be Hard To Achieve

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. Unfortunately, Tiger Brands' earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Growth of 1.6% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. This could mean the dividend doesn't have the growth potential we look for going into the future.

Our Thoughts On Tiger Brands' Dividend

In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Tiger Brands' payments, as there could be some issues with sustaining them into the future. While Tiger Brands is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. 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 1 warning sign for Tiger Brands that investors need to be conscious of moving forward. Is Tiger Brands not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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