Reece Limited's (ASX:REH) dividend will be increasing to AU$0.12 on 27th of October. Although the dividend is now higher, the yield is only 0.9%, which is below the industry average.

View our latest analysis for Reece

Reece's Payment Has Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, Reece's dividend was comfortably covered by both cash flow and earnings. This indicates that quite a large proportion of earnings is being invested back into the business.

The next year is set to see EPS grow by 6.1%. If the dividend continues along recent trends, we estimate the payout ratio will be 39%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The dividend has gone from AU$0.12 in 2011 to the most recent annual payment of AU$0.24. This works out to be a compound annual growth rate (CAGR) of approximately 7.4% a year over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

Reece May Find It Hard To Grow The Dividend

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. However, Reece has only grown its earnings per share at 2.7% per annum over the past five years. The company has been growing at a pretty soft 2.7% per annum, and is paying out quite a lot of its earnings to shareholders. This could mean the dividend doesn't have the growth potential we look for going into the future.

In Summary

Overall, this is a reasonable dividend, and it being raised is an added bonus. While the payout ratios are a good sign, we are less enthusiastic about the company's dividend record. The dividend looks okay, but there have been some issues in the past, so we would be a little bit cautious.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 2 warning signs for Reece that investors should take into consideration. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

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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