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Codan Limited (ASX:CDA) has announced that it will be increasing its dividend on the 10th of September to AU$0.17. This makes the dividend yield 1.7%, which is above the industry average.
Codan's Payment Has Solid Earnings Coverage
We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Based on the last payment, Codan was quite comfortably earning enough to cover the dividend. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
Over the next year, EPS is forecast to expand by 41.5%. If the dividend continues along recent trends, we estimate the payout ratio will be 59%, which is in the range that makes us comfortable with the sustainability of the dividend.
The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. Since 2011, the first annual payment was AU$0.09, compared to the most recent full-year payment of AU$0.27. This means that it has been growing its distributions at 12% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.
The Dividend Looks Likely To Grow
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. Codan has impressed us by growing EPS at 41% 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.
We Really Like Codan's Dividend
In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All of these factors considered, we think this has solid potential as a dividend stock.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. As an example, we've identified 1 warning sign for Codan that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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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