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The board of Famous Brands Limited (JSE:FBR) has announced that it will be paying its dividend of ZAR1.38 on the 18th of December, an increased payment from last year's comparable dividend. Based on this payment, the dividend yield for the company will be 6.3%, which is fairly typical for the industry.
See our latest analysis for Famous Brands
Famous Brands' Dividend Is Well Covered By Earnings
Unless the payments are sustainable, the dividend yield doesn't mean too much. The last dividend made up a very large portion of earnings and also represented 90% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.
If the trend of the last few years continues, EPS will grow by 43.2% over the next 12 months. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 55% which brings it into quite a comfortable range.
Dividend Volatility
The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2013, the annual payment back then was ZAR2.50, compared to the most recent full-year payment of ZAR3.71. This implies that the company grew its distributions at a yearly rate of about 4.0% 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.
Famous Brands' Dividend Might Lack Growth
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Famous Brands has impressed us by growing EPS at 43% per year over the past five years. However, Famous Brands isn't reinvesting a lot back into the business, so we wonder how quickly it will be able to grow in the future.
In Summary
Overall, we always like to see the dividend being raised, but we don't think Famous Brands will make a great income stock. In general, the distributions are a little bit higher than we would like, but we can't ignore the fact the quickly growing earnings gives this stock great potential in the future. 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. For example, we've picked out 2 warning signs for Famous Brands that investors should know about before committing capital to this stock. Is Famous Brands not quite the opportunity you were looking for? Why not check out our selection of top 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.