Pennon Group Plc (LON:PNN) will increase its dividend on the 5th of September to £0.3033, which is 1.9% higher than last year’s payment from the same period of £0.298. This will take the dividend yield to an attractive 6.5%, providing a nice boost to shareholder returns.
See our latest analysis for Pennon Group
Pennon Group Is Paying Out More Than It Is Earning
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Despite not generating a profit, Pennon Group is still paying a dividend. The company is also yet to generate cash flow, so the dividend sustainability is definitely questionable.
The next 12 months is set to see EPS grow by 164.8%. If the dividend continues on its recent course, the company could be paying out several times what it earns in the next 12 months, which could start applying pressure to the balance sheet.
Dividend Volatility
The company’s dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was £0.455 in 2014, and the most recent fiscal year payment was £0.444. The dividend has shrunk at a rate of less than 1% a year over this period. Generally, we don’t like to see a dividend that has been declining over time as this can degrade shareholders’ returns and indicate that the company may be running into problems.
Dividend Growth Potential Is Shaky
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Over the past five years, it looks as though Pennon Group’s EPS has declined at around 57% a year. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It’s not all bad news though, as the earnings are predicted to rise over the next 12 months – we would just be a bit cautious until this becomes a long term trend.
We’re Not Big Fans Of Pennon Group’s Dividend
Overall, while the dividend being raised can be good, there are some concerns about its long term sustainability. The company’s earnings aren’t high enough to be making such big distributions, and it isn’t backed up by strong growth or consistency either. We don’t think that this is a great candidate to be an income stock.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. To that end, Pennon Group has 3 warning signs (and 2 which shouldn’t be ignored) we think you should know about. 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.
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