African Rainbow Minerals (JSE:ARI) Is Paying Out Less In Dividends Than Last Year

African Rainbow Minerals Limited's (JSE:ARI) dividend is being reduced from last year's payment covering the same period to ZAR6.00 on the 8th of April. The yield is still above the industry average at 6.7%.

View our latest analysis for African Rainbow Minerals

African Rainbow Minerals' Dividend Is Well Covered By Earnings

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, African Rainbow Minerals was paying out 72% of earnings, but a comparatively small 71% of free cash flows. This leaves plenty of cash for reinvestment into the business.

Looking forward, earnings per share is forecast to rise by 15.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 75%, which is in the range that makes us comfortable with the sustainability of the dividend.

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 ZAR5.10 in 2014, and the most recent fiscal year payment was ZAR12.00. This works out to be a compound annual growth rate (CAGR) of approximately 8.9% a year over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

The Dividend's Growth Prospects Are Limited

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Earnings have grown at around 3.1% a year for the past five years, which isn't massive but still better than seeing them shrink. There are exceptions, but limited earnings growth and a high payout ratio can signal that a company has reached maturity. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

Our Thoughts On African Rainbow Minerals' Dividend

Overall, we think that African Rainbow Minerals could make a reasonable income stock, even though it did cut the dividend this year. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 3 warning signs for African Rainbow Minerals that you should be aware of before investing. Is African Rainbow Minerals 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.