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Endeavour Group Limited (ASX:EDV) has announced a dividend payment of AU$0.075 per share, scheduled for distribution on the 10th of October. This dividend represents a yield of 4.1%, which aligns with the industry average, offering a solid return for income-focused investors. However, while the yield is appealing, it's crucial to evaluate the sustainability and growth potential of this dividend.
Dividend Coverage: Earnings and Cash Flow
One of the key indicators of dividend sustainability is the coverage provided by both earnings and cash flow. Prior to this announcement, Endeavour Group was distributing 76% of its earnings as dividends. While this payout ratio is somewhat high, it's not uncommon for companies in the consumer staples sector, where consistent cash flows often support higher payout ratios.
More importantly, Endeavour Group is only paying out 50% of its free cash flow as dividends. This lower payout ratio from cash flow is a positive sign, as it suggests that the company has ample room to sustain its dividend payments while retaining sufficient cash for reinvestment and other financial needs. With a forecasted 13.1% rise in earnings per share over the next year, the company’s ability to maintain its dividend looks promising, even if the payout ratio slightly increases to 78%.
Dividend Stability and Growth Potential
When assessing dividend stocks, consistency in dividend payments is critical. Endeavour Group's dividend history has been somewhat unstable, with fluctuations that make it difficult to gauge long-term reliability. Since 2021, the company’s annual dividend has increased from AU$0.07 to AU$0.218, representing an impressive compound annual growth rate (CAGR) of approximately 46%. However, it's important to note that the dividend has been cut at least once during this period.
Dividend cuts can be a red flag for income investors, as companies that cut dividends once are often at risk of cutting them again, especially in challenging economic conditions. While Endeavour Group has demonstrated the ability to grow its distributions rapidly, the past cuts suggest a level of caution is warranted when considering the stock solely for its dividend.
Earnings Growth and Future Dividend Potential
For dividends to continue growing, a company needs to consistently increase its earnings. Unfortunately, Endeavour Group's earnings per share (EPS) growth has been modest, averaging just 4.8% per annum over the past three years. This slow growth in earnings, combined with a high payout ratio, raises concerns about the company's ability to sustain significant dividend increases in the future.
Given that most of its profits are being distributed as dividends, Endeavour Group may struggle to achieve substantial dividend growth unless it can accelerate its earnings growth. Investors should keep an eye on the company’s earnings trajectory, as any stagnation or decline could pressure the sustainability of the dividend.
