ARB Corporation Limited (ASX:ARB) will increase its dividend from last year's comparable payment on the 18th of October to A$0.35. This takes the annual payment to 1.6% of the current stock price, which unfortunately is below what the industry is paying.

Check out our latest analysis for ARB

ARB's Projected Earnings Seem Likely To Cover Future Distributions

If it is predictable over a long period, even low dividend yields can be attractive. ARB was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 77% indicates it is more focused on returning cash to shareholders than growing the business.

Over the next year, EPS is forecast to expand by 29.3%. Assuming the dividend continues along recent trends, we think the payout ratio could be 47% by next year, which is in a pretty sustainable range.

ARB Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2014, the annual payment back then was A$0.285, compared to the most recent full-year payment of A$0.69. This means that it has been growing its distributions at 9.2% per annum over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

The Dividend Looks Likely To Grow

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. ARB has seen EPS rising for the last five years, at 12% per annum. The company is paying a reasonable amount of earnings to shareholders, and is growing earnings at a decent rate so we think it could be a decent dividend stock.

In Summary

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. On the plus side, the dividend looks sustainable by most measures but it is let down by the lack of cash flows. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 13 analysts we track are forecasting for ARB for free with public analyst estimates for the company. If you are a dividend investor, you might also want to look at our curated list of high yield 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.