Katana Capital Limited (ASX:KAT) has announced that it will pay a dividend of A$0.005 per share on the 31st of January. This means the annual payment will be 1.6% of the current stock price, which is lower than the industry average.

See our latest analysis for Katana Capital

The dividend yield is a little bit low, but sustainability of the payments is also an important part of evaluating an income stock. Katana Capital is quite easily earning enough to cover the dividend, however it is being let down by weak cash flows. In general, we consider cash flow to be more important than earnings, so we would be cautious about relying on the sustainability of this dividend.

If the trend of the last few years continues, EPS will grow by 0.5% over the next 12 months. Assuming the dividend continues along recent trends, we think the payout ratio could be 25% by next year, which is in a pretty sustainable range.

The company has a long dividend track record, but it doesn’t look great with cuts in the past. The dividend has gone from an annual total of A$0.055 in 2015 to the most recent total annual payment of A$0.02. The dividend has shrunk at around 9.6% a year during that period. Declining dividends isn’t generally what we look for as they can indicate that the company is running into some challenges.

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. However, Katana Capital’s EPS was effectively flat over the past five years, which could stop the company from paying more every year. While growth may be thin on the ground, Katana Capital could always pay out a higher proportion of earnings to increase shareholder returns.

In summary, while it’s good to see that the dividend hasn’t been cut, we are a bit cautious about Katana Capital’s payments, as there could be some issues with sustaining them into the future. While the low payout ratio is a redeeming feature, this is offset by the minimal cash to cover the payments. We would be a touch cautious of relying on this stock primarily for the dividend income.

It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we’ve picked out 2 warning signs for Katana Capital that investors should take into consideration. Is Katana Capital 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.