Royal Mail (LON:RMG) Is Increasing Its Dividend To UK£0.13
Royal Mail plc (LON:RMG) will increase its dividend on the 6th of September to UK£0.13. This will take the annual payment from 9.8% to 15% of the stock price, which is above what most companies in the industry pay.
See our latest analysis for Royal Mail
Royal Mail Is Paying Out More Than It Is Earning
A big dividend yield for a few years doesn't mean much if it can't be sustained. However, Royal Mail's earnings easily cover the dividend. As a result, a large proportion of what it earned was being reinvested back into the business.
EPS is set to fall by 47.0% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could reach 104%, which could put the dividend in jeopardy if the company's earnings don't improve.
Royal Mail's Dividend Has Lacked Consistency
Royal Mail has been paying dividends for a while, but the track record isn't stellar. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2014, the first annual payment was UK£0.13, compared to the most recent full-year payment of UK£0.27. This implies that the company grew its distributions at a yearly rate of about 9.1% over that duration. 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.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Royal Mail has seen EPS rising for the last five years, at 18% per annum. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.
We Really Like Royal Mail's Dividend
Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. The company is generating plenty of cash, and the earnings also quite easily cover the distributions. If earnings do fall over the next 12 months, the dividend could be buffeted a little bit, but we don't think it should cause too much of a problem in the long term. All in all, this checks a lot of the boxes we look for when choosing an income stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Royal Mail has 3 warning signs (and 1 which can't be ignored) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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