ARB Corporation Limited (ASX:ARB) is reducing its dividend from last year's comparable payment to A$0.30 on the 20th of October. This means that the annual payment is 1.8% of the current stock price, which is lower than what the rest of the industry is paying.

View our latest analysis for ARB

ARB's Dividend Is Well Covered By Earnings

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. The last payment was quite easily covered by earnings, but it made up 111% of cash flows. This signals that the company is more focused on returning cash flow to shareholders, but it could mean that the dividend is exposed to cuts in the future.

Looking forward, earnings per share is forecast to rise by 36.5% over the next year. If the dividend continues on this path, the payout ratio could be 46% by next year, which we think can be pretty sustainable going forward. historic-dividend

ARB Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from an annual total of A$0.28 in 2013 to the most recent total annual payment of A$0.60. This implies that the company grew its distributions at a yearly rate of about 7.9% over that duration. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.

The Dividend Looks Likely To Grow

The company's investors will be pleased to have been receiving dividend income for some time. ARB has impressed us by growing EPS at 11% per year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.

Our Thoughts On ARB's Dividend

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. This company is not in the top tier of income providing stocks.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Earnings growth generally bodes well for the future value of company dividend payments. See if the 10 ARB analysts we track are forecasting continued growth with our freereport on analyst estimates for the company. 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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