Is Cardno Limited's 11% dividend yield too good to be true?

Don't be fooled by a big yield for Cardno Limited (ASX:CDD), as sustainability might be a problem.

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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.

Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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