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Associated British Foods plc (LON:ABF) has announced that it will be increasing its periodic dividend on the 7th of July to £0.142, which will be 2.9% higher than last year's comparable payment amount of £0.138. Based on this payment, the dividend yield for the company will be 2.3%, which is fairly typical for the industry.
Check out our latest analysis for Associated British Foods
Associated British Foods' Earnings Easily Cover The Distributions
We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Based on the last payment, Associated British Foods' earnings were much higher than the dividend, but it wasn't converting those earnings into cash flow. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.
Looking forward, earnings per share is forecast to rise by 74.2% over the next year. If the dividend continues on this path, the payout ratio could be 25% by next year, which we think can be pretty sustainable going forward.
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of £0.285 in 2013 to the most recent total annual payment of £0.437. This implies that the company grew its distributions at a yearly rate of about 4.4% 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 Is Doubtful
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Associated British Foods has seen earnings per share falling at 6.0% per year over the last five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.
Associated British Foods' Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think Associated British Foods will make a great income stock. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Associated British Foods that investors need to be conscious of moving forward. Is Associated British Foods not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.