Euroz Hartleys Group Limited (ASX:EZL) will pay a dividend of A$0.02 on the 21st of February. This will take the dividend yield to an attractive 4.8%, providing a nice boost to shareholder returns.

See our latest analysis for Euroz Hartleys Group

Euroz Hartleys Group's Projections Indicate Future Payments May Be Unsustainable

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 136% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 41%. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.

Over the next year, EPS could expand by 25.4% if the company continues along the path it has been on recently. Assuming the dividend continues along recent trends, we think the payout ratio could reach 114%, which probably can't continue without starting to put some pressure on the balance sheet.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was A$0.127 in 2015, and the most recent fiscal year payment was A$0.0475. This works out to be a decline of approximately 9.3% per year over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Euroz Hartleys Group Might Find It Hard To Grow Its Dividend

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. We are encouraged to see that Euroz Hartleys Group has grown earnings per share at 25% per year over the past five years. Although earnings per share is up nicely Euroz Hartleys Group is paying out 136% of its earnings as dividends, which we feel is borderline unsustainable without extenuating circumstances.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Euroz Hartleys Group will make a great income stock. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, Euroz Hartleys Group has 5 warning signs (and 1 which is concerning) we think you should know about. Is Euroz Hartleys Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.