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Supply Network Limited (ASX:SNL) recently announced a substantial 40% increase in its dividend, making it an intriguing option among ASX dividend stocks. The company's board revealed that the dividend will be raised to A$0.28 on the 3rd of October, up from last year's A$0.20. This move takes the annual payment to an impressive 2.7% of the stock price, surpassing the industry average.
Evaluating the Sustainability of Supply Network's Dividend
While a high dividend yield may be enticing, it is essential to ensure its sustainability for the long term. The last dividend represented a significant portion of earnings and accounted for 80% of free cash flows. This suggests that the company prioritizes returning cash to shareholders over expanding its operations. However, there are no apparent signs that the dividend may be at risk.
Looking ahead, earnings per share is projected to increase by 35.2% in the next year. If the dividend maintains its recent trends, the estimated payout ratio will be 73%, which falls within the range indicating a sustainable dividend.
Examining Dividend Volatility
The dividend history of ASX SNL has experienced fluctuations, with at least one cut in the past decade. The dividend has risen from an annual total of A$0.075 in 2013 to the most recent annual payment of A$0.40, showing an impressive growth rate of 18% per year. However, the presence of dividend cuts raises concerns about the company's ambitious payout policy.
Anticipating Future Dividend Growth
Given the dividend's volatility, it becomes more critical to assess the growth of earnings per share. Supply Network has witnessed a consistent rise in EPS over the past five years, growing at an impressive rate of 25% annually. However, it appears that the company is not reinvesting significantly back into its business, which raises questions about its potential for future growth.
In Summary
Although Supply Network is currently raising its dividend, it may not be an ideal income stock in the long run. The company's inconsistent dividend history, coupled with a relatively low payout of earnings, suggests caution. Despite the dividend hike, we believe this company may not be an optimal choice for income-oriented investors. It is essential to thoroughly assess the sustainability and growth potential of any investment, taking into account both dividend stability and the company's overall business strategy.
