Domino's Pizza Enterprises Limited (ASX:DMP) has announced that on 3rd of October, it will be paying a dividend of A$0.215, which a reduction from last year's comparable dividend. The dividend yield of 5.1% is still a nice boost to shareholder returns, despite the cut.
While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Domino's Pizza Enterprises' stock price has reduced by 36% in the last 3 months, which is not ideal for investors and can explain a sharp increase in the dividend yield.
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Despite not being profitable, Domino's Pizza Enterprises is paying out most of its free cash flow as a dividend. Paying a dividend while unprofitable is generally considered an aggressive policy, and with limited funds retained for reinvestment, growth may be slow.
The next 12 months is set to see EPS grow by 129.3%. If the dividend continues on its recent course, the company could be paying out several times what it earns in the next 12 months, which could start applying pressure to the balance sheet.
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$0.492 in 2015, and the most recent fiscal year payment was A$0.77. This means that it has been growing its distributions at 4.6% per annum over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.
The Dividend Has Limited Growth Potential
With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Domino's Pizza Enterprises' EPS has fallen by approximately 33% per year during the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.