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The board of Diversified Royalty Corp. (TSE:DIV) has announced that it will pay a dividend of CA$0.0208 per share on the 30th of April. Based on this payment, the dividend yield on the company's stock will be 9.4%, which is an attractive boost to shareholder returns.
Estimates Indicate Diversified Royalty's Could Struggle to Maintain Dividend Payments In The Future
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, the company's dividend was higher than its profits, and made up 90% of cash flows. While the cash payout ratio isn't necessarily a cause for concern, the company is probably focusing more on returning cash to shareholders than growing the business.
Over the next year, EPS is forecast to expand by 40.9%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 116%, which probably can't continue without putting some pressure on the balance sheet.
Check out our latest analysis for Diversified Royalty
Diversified Royalty Has A Solid Track Record
The company has an extended history of paying stable dividends. The dividend has gone from an annual total of CA$0.188 in 2015 to the most recent total annual payment of CA$0.25. This works out to be a compound annual growth rate (CAGR) of approximately 2.9% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.
Diversified Royalty May Find It Hard To Grow The Dividend
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, Diversified Royalty has only grown its earnings per share at 4.2% per annum over the past five years. The company is paying out a lot of its profits, even though it is growing those profits pretty slowly. Limited recent earnings growth and a high payout ratio makes it hard for us to envision strong future dividend growth, unless the company should have substantial pricing power or some form of competitive advantage.
Diversified Royalty's Dividend Doesn't Look Sustainable
Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We would probably look elsewhere for an income investment.