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The board of Royal Bank of Canada (TSE:RY) has announced that it will pay a dividend of CA$1.08 per share on the 24th of November. This means that the annual payment will be 3.4% of the current stock price, which is in line with the average for the industry.
Royal Bank of Canada's Payment Has Solid Earnings Coverage
Solid dividend yields are great, but they only really help us if the payment is sustainable. Prior to this announcement, Royal Bank of Canada's earnings easily covered the dividend, but free cash flows were negative. No cash flows could definitely make returning cash to shareholders difficult, or at least mean the balance sheet will come under pressure.
Looking forward, earnings per share is forecast to rise by 4.2% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 42%, which is in the range that makes us comfortable with the sustainability of the dividend.
Royal Bank of Canada Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2011, the dividend has gone from CA$2.00 to CA$4.32. This works out to be a compound annual growth rate (CAGR) of approximately 8.0% a year over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.
The Dividend Has Growth Potential
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. It's encouraging to see Royal Bank of Canada has been growing its earnings per share at 9.0% a year over the past five years. The lack of cash flows does make us a bit cautious though, especially when it comes to the future of the dividend.
Our Thoughts On Royal Bank of Canada's Dividend
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about Royal Bank of Canada's payments, as there could be some issues with sustaining them into the future. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. We don't think Royal Bank of Canada is a great stock to add to your portfolio if income is your focus.
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 10 Royal Bank of Canada analysts we track are forecasting continued growth with our free report on analyst estimates for the company. We have also put together a list of global stocks with a solid dividend.
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.
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