Delfi Limited (SGX:P34) is reducing its dividend from last year's comparable payment to $0.0157 on the 16th of May. The dividend yield will be in the average range for the industry at 6.0%.

See our latest analysis for Delfi

Delfi's Payment Could Potentially Have Solid Earnings Coverage

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. The last dividend was quite comfortably covered by Delfi's earnings, but it was a bit tighter on the cash flow front. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.

Over the next year, EPS is forecast to expand by 15.2%. If the dividend continues on this path, the payout ratio could be 69% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was $0.04 in 2015, and the most recent fiscal year payment was $0.0324. The dividend has shrunk at around 2.1% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Delfi May Find It Hard To Grow The Dividend

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. Earnings per share has been crawling upwards at 3.8% per year. Growth of 3.8% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. This isn't bad in itself, but unless earnings growth pick up we wouldn't expect dividends to grow either.

In Summary

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While Delfi is earning enough to cover the dividend, we are generally unimpressed with its future prospects. We would probably look elsewhere for an income investment.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Delfi that investors need to be conscious of moving forward. Is Delfi not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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