Duxton Water Limited (ASX:D2O) will increase its dividend on the 29th of April to AU$0.032, which is 6.7% higher than last year. This takes the dividend yield to 4.1%, which shareholders will be pleased with.
See our latest analysis for Duxton Water
Duxton Water Doesn't Earn Enough To Cover Its Payments
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, Duxton Water was paying out 88% of earnings, but a comparatively small 54% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.
Looking forward, EPS could fall by 5.7% if the company can't turn things around from the last few years. If the dividend continues along the path it has been on recently, the payout ratio in 12 months could be 100%, which is definitely a bit high to be sustainable going forward.
Duxton Water Is Still Building Its Track Record
Duxton Water's dividend has been pretty stable for a little while now, but we will continue to be cautious until it has been demonstrated for a few more years. Since 2017, the dividend has gone from AU$0.023 to AU$0.064. This implies that the company grew its distributions at a yearly rate of about 23% over that duration. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.
Dividend Growth Is Doubtful
The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. In the last three years, Duxton Water's earnings per share has shrunk at approximately 5.7% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits.
Our Thoughts On Duxton Water's Dividend
Overall, we always like to see the dividend being raised, but we don't think Duxton Water 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. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come across 2 warning signs for Duxton Water you should be aware of, and 1 of them makes us a bit uncomfortable. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.