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Famous Brands Limited (JSE:FBR) will increase its dividend from last year's comparable payment on the 18th of December to ZAR1.38. This makes the dividend yield about the same as the industry average at 7.9%.
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. Prior to this announcement, Famous Brands' dividend was making up a very large proportion of earnings and perhaps more concerning was that it was 113% of cash flows. This is certainly a risk factor, as reduced cash flows could force the company to pay a lower dividend.
If the trend of the last few years continues, EPS will grow by 43.2% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio will be 55%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Dividend Volatility
While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was ZAR2.50 in 2013, and the most recent fiscal year payment was ZAR4.66. This means that it has been growing its distributions at 6.4% per annum over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.
Famous Brands' Dividend Might Lack Growth
Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's encouraging to see that Famous Brands has been growing its earnings per share at 43% a year over the past five years. Earnings per share is growing nicely, but the company is paying out most of its earnings as dividends. This might be sustainable, but we wonder why Famous Brands is not retaining those earnings to reinvest in growth.
Famous Brands' Dividend Doesn't Look Sustainable
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. We don't think Famous Brands is a great stock to add to your portfolio if income is your focus.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Famous Brands that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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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.