Stock Analysis

Kumba Iron Ore (JSE:KIO) Is Paying Out Less In Dividends Than Last Year

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JSE:KIO
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Kumba Iron Ore Limited (JSE:KIO) has announced that on 21st of August, it will be paying a dividend ofZAR22.60, which a reduction from last year's comparable dividend. The dividend yield will be in the average range for the industry at 6.7%.

See our latest analysis for Kumba Iron Ore

Kumba Iron Ore's Payment Has Solid Earnings Coverage

Solid dividend yields are great, but they only really help us if the payment is sustainable. Based on the last payment, Kumba Iron Ore's profits didn't cover the dividend, but the company was generating enough cash instead. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Looking forward, earnings per share is forecast to rise by 43.8% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 73% which would be quite comfortable going to take the dividend forward.

historic-dividend
JSE:KIO Historic Dividend July 28th 2023

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 dividend has gone from an annual total of ZAR31.70 in 2013 to the most recent total annual payment of ZAR32.60. Its dividends have grown at less than 1% per annum over this time frame. Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Kumba Iron Ore May Find It Hard To Grow The Dividend

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. Earnings per share has been crawling upwards at 3.9% per year. The earnings growth is anaemic, and the company is paying out 96% of its profit. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

In Summary

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. 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 Kumba Iron Ore that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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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.

About JSE:KIO

Kumba Iron Ore

Kumba Iron Ore Limited, together with its subsidiaries, engages in the exploration, extraction, beneficiation, marketing, sale, and shipping of iron ore for the steel industry primarily in South Africa, China, rest of Asia, Europe, the Middle East, and North Africa.

Outstanding track record with excellent balance sheet and pays a dividend.