Reunert Limited (RLO): High Dividend Yield Tempts, But Earnings Decline Raises Sustainability Questions

Reunert Limited (JSE:RLO), a diversified industrial conglomerate operating in electrical engineering, ICT, and applied electronics, has long been a dividend stalwart for income-focused investors. However, recent financial trends raise critical questions: Is its generous dividend yield sustainable amid falling earnings, or does it signal an impending reckoning? This analysis explores the risks and rewards for investors considering Reunert's upcoming dividend and its long-term viability.

The Dividend Snapshot
Reunert's trailing dividend yield stands at 6.61%, one of the highest in its sector, with an upcoming payment of ZAR0.90 per share scheduled for June 30, 2025 (ex-dividend date: June 25). This dividend is well-covered by earnings, with a payout ratio of 61% (net profit) and 68.5% (cash flow). Analysts note a total shareholder yield of 8.3%, combining dividends and buybacks, which adds to its appeal for income investors.

The Earnings Dilemma
Despite robust dividend coverage, Reunert's earnings per share (EPS) have declined by 3.4% annually over five years, with the first half of fiscal 2025 reporting a 24.7% drop in EPS (ZAR2.43 vs. ZAR2.96 in 2024). This underperformance stems from sector-specific headwinds, including supply chain disruptions and weaker demand in its key markets. Worse, dividend growth has been stagnant, shrinking by -0.9% annually over the past decade, a stark contrast to its high yield.

Sustainability: Glass Half-Full or Half-Empty?
Pros:
1. Payout Ratios Under Control: At 61% (earnings) and 68.5% (cash flow), dividends remain comfortably within sustainable ranges. These ratios are lower than distress levels (typically >80%), suggesting Reunert isn't overextending itself.
2. Valuation Discount: Analysts rate RLO as 21% undervalued, with a price target of ZAR95.00. This discount could signal a recovery opportunity, potentially boosting EPS and dividend growth in the future.
3. Management Shifts: The appointment of Mark Kathan as CFO (effective April 2025) and strategic portfolio reviews may improve operational efficiency and capital allocation.

Risks:
1. Earnings Volatility: Reunert's EPS has fluctuated sharply, with fiscal 2024 full-year results missing analyst expectations. Persistent declines could force dividend cuts if earnings remain depressed.
2. Stagnant Growth: A -3.2% dividend growth rate over the past decade underscores a lack of organic expansion. Without revenue or margin improvements, the dividend's trajectory remains bleak.
3. Sector Challenges: Its reliance on industries sensitive to economic cycles—like infrastructure and manufacturing—leaves it vulnerable to broader downturns.

The Investment Case: Proceed with Caution
Reunert's 6.61% yield offers compelling income potential, especially in a low-interest-rate environment. However, investors must weigh this against the risks of eroding earnings and stagnant growth.

Buy Signal:
- If you're a long-term income investor willing to accept volatility and believe Reunert's valuation rebound will drive earnings recovery.
- The upcoming dividend (ZAR0.90) is safe for now, with coverage ratios intact.

Hold/Watch Signal:
- For those seeking consistent dividend growth, RLO's flat trajectory may be underwhelming.
- Monitor the full fiscal 2025 results (due late 2025) for signs of stabilization or further declines.

Sell Signal:
- If EPS continues to deteriorate, or if payout ratios breach 75%—a red flag for overextension.

Final Verdict
Reunert's dividend remains safe in the short term, buoyed by strong cash flow and conservative payout ratios. However, its long-term sustainability hinges on reversing earnings declines and reigniting growth. For income investors with a high-risk tolerance, the current yield offers value, but they must be prepared for volatility. Conservative investors may prefer to wait for clearer signs of turnaround before committing capital.

Investment Recommendation:
Hold for income seekers with a 3–5 year horizon, but avoid if you prioritize stable dividend growth or cannot tolerate earnings uncertainty. The dividend is a double-edged sword: it's generous now, but its future depends on Reunert's ability to navigate its operational challenges.