Santam (JSE:SNT) Is Paying Out A Larger Dividend Than Last Year

Santam Ltd (JSE:SNT) has announced that it will be increasing its periodic dividend on the 26th of September to ZAR4.95, which will be 7.1% higher than last year's comparable payment amount of ZAR4.62. This takes the annual payment to 4.2% of the current stock price, which is about average for the industry.

View our latest analysis for Santam

Santam's Earnings Easily Cover The Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. Prior to this announcement, Santam was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.

The next year is set to see EPS grow by 26.7%. Assuming the dividend continues along recent trends, we think the payout ratio could be 46% by next year, which is in a pretty sustainable range.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of ZAR6.40 in 2013 to the most recent total annual payment of ZAR13.07. This works out to be a compound annual growth rate (CAGR) of approximately 7.4% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Santam might have put its house in order since then, but we remain cautious.

Santam Could Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Santam has impressed us by growing EPS at 5.6% per year over the past five years. The company is paying a reasonable amount of earnings to shareholders, and is growing earnings at a decent rate so we think it could be a decent dividend stock.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Santam's payments are rock solid. While Santam is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We don't think Santam is a great stock to add to your portfolio if income is your focus.

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 Santam that investors need to be conscious of moving forward. Is Santam not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.