Codan Limited (ASX:CDA) has announced that on 20th of September, it will be paying a dividend ofA$0.095, which a reduction from last year's comparable dividend. The dividend yield of 2.4% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for Codan

Codan's Earnings Easily Cover The Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment was quite easily covered by earnings, but it made up 113% of cash flows. While the company may be more focused on returning cash to shareholders than growing the business at this time, we think that a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

The next year is set to see EPS grow by 48.7%. If the dividend continues on this path, the payout ratio could be 39% by next year, which we think can be pretty sustainable going forward. historic-dividend

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was A$0.095 in 2013, and the most recent fiscal year payment was A$0.185. This means that it has been growing its distributions at 6.9% per annum over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Codan might have put its house in order since then, but we remain cautious.

We Could See Codan's Dividend Growing

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. Codan has impressed us by growing EPS at 9.9% 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 Codan's Dividend

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. While Codan is earning enough to cover the payments, the cash flows are lacking. 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 5 Codan 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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