Datatec (JSE:DTC) Is Increasing Its Dividend To $1.95

The board of Datatec Limited (JSE:DTC) has announced that it will be paying its dividend of $1.95 on the 17th of July, an increased payment from last year's comparable dividend. This takes the dividend yield to 4.8%, which shareholders will be pleased with.

Check out our latest analysis for Datatec

Datatec Is Paying Out More Than It Is Earning

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Even though Datatec isn't generating a profit, it is generating healthy free cash flows that easily cover the dividend. We generally think that cash flow is more important than accounting measures of profit, so we are fairly comfortable with the dividend at this level.

EPS is forecast to rise very quickly over the next 12 months. Assuming the dividend continues along recent trends, we could see the payout ratio reach 3,167%, which is on the unsustainable side.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the dividend has gone from $0.18 total annually to $0.101. The dividend has shrunk at around 5.6% a year during that period. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

The Company Could Face Some Challenges Growing The Dividend

Given that the track record hasn't been stellar, we really want to see earnings per share growing over time. Datatec has seen EPS rising for the last five years, at 68% per annum. While the company is not yet turning a profit, it is growing at a good rate. If this trajectory continues and the company can turn a profit soon, it could bode well for the dividend going forward.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Datatec's payments are rock solid. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. This company is not in the top tier of income providing stocks.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Datatec that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield 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.