Datatec Limited's (JSE:DTC) dividend will be increasing from last year's payment of the same period to $1.95 on 17th of July. This takes the dividend yield to 4.8%, which shareholders will be pleased with.
See our latest analysis for Datatec
Datatec Is Paying Out More Than It Is Earning
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. While Datatec is not profitable, it is paying out less than 75% of its free cash flow, which means that there is plenty left over for reinvestment into the business. 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.
Over the next year, EPS is forecast to grow rapidly. If the dividend continues along recent trends, we estimate the payout ratio could reach 3,167%, which is unsustainable.
Dividend Volatility
The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the dividend has gone from $0.18 total annually to $0.101. This works out to be a decline of approximately 5.6% per year over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.
The Company Could Face Some Challenges Growing The Dividend
With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS is growing. It's encouraging to see that Datatec has been growing its earnings per share at 68% a year over the past five years. While the company is not yet turning a profit, it is growing at a good rate. If the company can turn a profit relatively soon, we can see this becoming a reliable income stock.
Our Thoughts On Datatec's Dividend
Overall, we always like to see the dividend being raised, but we don't think Datatec will make a great income stock. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Datatec that investors need to be conscious of moving forward. Is Datatec not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.