Incitec Pivot Limited (ASX:IPL) has announced that on 4th of July, it will be paying a dividend ofA$0.043, which a reduction from last year's comparable dividend. The yield is still above the industry average at 5.0%.

View our latest analysis for Incitec Pivot

Incitec Pivot Doesn't Earn Enough To Cover Its Payments

If the payments aren't sustainable, a high yield for a few years won't matter that much. Incitec Pivot isn't generating any profits, and it is paying out a very high proportion of the cash it is earning. These payout levels would generally be quite difficult to keep up.

Earnings per share is forecast to rise exponentially over the next year. Assuming the dividend continues along recent trends, we could see the payout ratio reach 426%, which is on the unsustainable side. historic-dividend

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The dividend has gone from an annual total of A$0.092 in 2014 to the most recent total annual payment of A$0.15. This works out to be a compound annual growth rate (CAGR) of approximately 5.0% a year over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

The Dividend Has Growth Potential

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 Incitec Pivot has grown earnings per share at 7.0% per year over the past five years. It's not an ideal situation that the company isn't turning a profit but the growth recently is a positive sign. Assuming the company can post positive net income numbers soon, it could has the potential to be a decent dividend payer.

Incitec Pivot's Dividend Doesn't Look Sustainable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. As an example, we've identified 1 warning sign for Incitec Pivot that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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