There's a famous saying that goes along the lines of:
If it looks too good to be true, it usually is.
I prefer the saying:
If it looks too good to be true, it needs more research.
That's the approach I've taken following the recent reporting season where all of a company's good and bad decisions are on display. One company that jumped out at me was Cardno Limited (ASX: CDD).
The company's share price has more than halved from $7.30 a year ago to just $3.28 today, but Cardno paid out 36 cents per share of dividends in the 2014 financial year, correlating to a dividend yield of 11% or 15% grossed up at the current share price of $3.30.
Too Good to be True?
Last month Cardno reported net profit after tax of $31.5 million for the six months to 31 December 2014, at the top end of the revised guidance issued in November, and gross revenue of $686.1 million, up 8.4% on the previous corresponding period.
The problem is that net profit and basic earnings per share were up to 36% lower than a year earlier. This resulted in a 32% fall in the interim dividend to 13 cents, from 19 cents a year earlier.
For current investors, this is obviously a bad sign, however the group's involvement in the mining services industry should have been a red flag for some time. Analysts are predicting a 30% fall in earnings per share for the full financial year and a 10 cents per share reduction in the dividend to 26 cents.
Is An 8% Yield Good Enough?
At the current price of $3.30, a 26 cents per share dividend corresponds to a yield of nearly 8%, or 10.4% grossed up. Next year analysts see the payout reducing further to around 20 cents, or a 6% yield.
In this scenario, I think that Cardno's dividend certainly is too good to be true and investors should look for companies that grow their payout over time.