Universal Store Holdings Limited (ASX:UNI) has announced that it will be increasing its dividend from last year's comparable payment on the 28th of March to A$0.22. Based on this payment, the dividend yield for the company will be 4.8%, which is fairly typical for the industry.

Check out our latest analysis for Universal Store Holdings

Universal Store Holdings' Projected Earnings Seem Likely To Cover Future Distributions

Solid dividend yields are great, but they only really help us if the payment is sustainable. Based on the last payment, Universal Store Holdings' profits didn't cover the dividend, but the company was generating enough cash instead. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.

Earnings per share is forecast to rise by 88.9% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 88% which is a bit high but can definitely be sustainable.

Universal Store Holdings' Dividend Has Lacked Consistency

The track record isn't the longest, but we are already seeing a bit of instability in the payments. Since 2021, the annual payment back then was A$0.10, compared to the most recent full-year payment of A$0.44. This implies that the company grew its distributions at a yearly rate of about 45% over that duration. 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.

Dividend Growth May Be Hard To Achieve

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. We are encouraged to see that Universal Store Holdings has grown earnings per share at 7.3% per year over the past five years. Although per-share earnings are growing at a credible rate, the massive payout ratio may limit growth in the company's future dividend payments.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Universal Store Holdings' payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. For example, we've picked out 2 warning signs for Universal Store Holdings that investors should know about before committing capital to this stock. Is Universal Store Holdings not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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