Nick Scali Limited (ASX:NCK) has announced that it will be increasing its dividend from last year's comparable payment on the 28th of March to A$0.40. This will take the dividend yield to an attractive 7.8%, providing a nice boost to shareholder returns.
Nick Scali's Payment Has Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last payment, Nick Scali was quite comfortably earning enough to cover the dividend. This means that a large portion of its earnings are being retained to grow the business.
EPS is set to fall by 20.7% over the next 12 months. However, if the dividend continues along recent trends, we estimate the payout ratio could reach 87%, meaning that most of the company's earnings are being paid out to shareholders.
The company has a long dividend track record, but it doesn't look great with cuts in the past. The dividend has gone from an annual total of A$0.09 in 2013 to the most recent total annual payment of A$0.80. This implies that the company grew its distributions at a yearly rate of about 24% over that duration. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
The Dividend Looks Likely To Grow
With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Nick Scali has impressed us by growing EPS at 20% per year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.
Nick Scali Looks Like A Great Dividend Stock
Overall, a dividend increase is always good, and we think that Nick Scali is a strong income stock thanks to its track record and growing earnings. The company is generating plenty of cash, and the earnings also quite easily cover the distributions. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All of these factors considered, we think this has solid potential as a dividend stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, Nick Scali has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield 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.
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