Australian Ethical Investment (ASX:AEF) Is Paying Out A Larger Dividend Than Last Year

Australian Ethical Investment Limited’s (ASX:AEF) periodic dividend will be increasing on the 18th of September to A$0.06, with investors receiving 20% more than last year’s A$0.05. This takes the annual payment to 1.9% of the current stock price, which unfortunately is below what the industry is paying.

See our latest analysis for Australian Ethical Investment

Australian Ethical Investment’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, Australian Ethical Investment’s dividend made up quite a large proportion of earnings but only 51% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Earnings per share could rise by 13.3% over the next year if things go the same way as they have for the last few years. If the dividend continues along recent trends, we estimate the payout ratio could reach 86%, which is on the higher side, but certainly still feasible.

Dividend Volatility

The company has a long dividend track record, but it doesn’t look great with cuts in the past. The annual payment during the last 10 years was A$0.016 in 2014, and the most recent fiscal year payment was A$0.08. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time. Australian Ethical Investment has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Australian Ethical Investment Might Find It Hard To Grow Its 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. It’s encouraging to see that Australian Ethical Investment has been growing its earnings per share at 13% a year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don’t think the dividend has many prospects for growth.

In Summary

In summary, while it’s always good to see the dividend being raised, we don’t think Australian Ethical Investment’s payments are rock solid. The payments haven’t been particularly stable and we don’t see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. This company is not in the top tier of income providing stocks.

Story continues

It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we’ve picked out 1 warning sign for Australian Ethical Investment that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.