Why Dividend Payout Ratio is an important Metric

Team Veye | 02-Apr-2024

The dividend payout ratio assumes its significance because it simultaneously signals the company’s plan of rewarding its shareholders as well as its growth investments, debt servicing or simply reserves for any future contingency. 

While a very high payout ratio, which sometimes even exceeds 100% could raise a red flag, a low payout ratio keeps a margin of safety. In such cases, even when there is a temporary fall in earnings, the company can still manage to pay dividends. In addition, with increased cash flow/earnings, can even enhance the dividends.

Payout ratio, when scrutinising with cash flow figures often reveals the true picture and can caution the investors and prevent them from falling prey to the high yield trap. Investors, while selecting Dividend Stocks considering dividend yield only, should look at the company’s financials, dividend history.

Astute investors, in order to diversify their portfolio, in line with their risk appetite, consider stocks having payout ratio at both ends, high and low, as a key measure. 

Such manoeuvring not only helps them play defensive but also enables them to reap the maximum benefit of such investments.

Here are Three stocks with good dividend yield and adequate payout ratio

BSP Financial Group Limited (ASX: BFL)

BSP is PNG's leading bank, with a proud history of serving its customers in PNG and other South Pacific countries. BSP Financial Group Limited continued to generate strong operating income, leaving ample room for capital allocation in new investments. 

Strong loan growth and stable asset quality may allow the company to report an increase in profits year after year. The company's capital base remains strong, well above the Bank of Papua New Guinea's prudential requirement of 12.0%. 

The company maintains a strong position to provide value to shareholders. Overall, the company's strong balance sheet, ample liquidity, and prudent capital management may drive further growth in the near to medium term. BFL has a history of regularly sharing profits with its shareholders through dividends, offering a stable and reliable return.

Dividend yield 10.48% Payout ratio 71%

Metcash Limited (ASX: MTS)

MTS has demonstrated consistent financial growth over the past five years, from 2019 to 2023. The company has seen a notable increase in revenue during this period, accompanied by rising underlying EBIT and reported PAT. Particularly, reported PAT has climbed from $239 million in FY21 to $259 million in FY23.

The company's outlook for its dividend cash flows looks promising, with a projected gradual escalation in the upcoming years. As of July 2024, the forecasted dividend stands at $0.04 per share, marking an initial uptick. This positive trajectory is expected to persist, with dividends projected to rise to $0.10 per share by December 2025 and further to $0.12 per share by December 2027.

Dividend yield 5.62% Payout ratio 71%

Vulcan Steel Limited (ASX: VSL)

Vulcan Steel has demonstrated its ability to consistently deliver value in comparison to its competitors, as evidenced by its revenue growth at a compound annual growth rate of approximately 15%. Furthermore, significant profitability indicators like a ROE (pre-tax) of 67.3%, a ROA (pre-tax) of 13.9%, and other figures demonstrate the company's strong value proposition. 

VSL maintains a balanced financial position in terms of paying out dividends to shareholders and investing the proceeds back into expanding the company. 

Dividend yield 6.28% Payout ratio 84%


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