The board of Supply Network Limited (ASX:SNL) has announced that it will pay a dividend of A$0.32 per share on the 4th of April. Even though the dividend went up, the yield is still quite low at only 1.5%.

View our latest analysis for Supply Network

Supply Network's Future Dividend Projections Appear Well Covered By Earnings

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Before making this announcement, Supply Network was paying out quite a large proportion of both earnings and cash flow, with the dividend being 199% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

Over the next year, EPS is forecast to expand by 60.1%. If the dividend continues on this path, the payout ratio could be 64% by next year, which we think can be pretty sustainable going forward.

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$0.09 in 2015 to the most recent total annual payment of A$0.56. This means that it has been growing its distributions at 20% per annum over that time. Despite the rapid growth in the dividend over the past number of years, we have seen the payments go down the past as well, so that makes us cautious.

The Dividend Looks Likely To Grow

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 Supply Network has grown earnings per share at 29% per year over the past five years. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Supply Network hasn't been doing.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Supply Network will make a great income stock. While Supply Network is earning enough to cover the payments, the cash flows are lacking. We don't think Supply Network is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for Supply Network that investors should know about before committing capital to this stock. Is Supply Network not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.