The board of Arbuthnot Banking Group PLC (LON:ARBB) has announced that it will be paying its dividend of £0.17 on the 23rd of September, an increased payment from last year's comparable dividend. This takes the annual payment to 5.3% of the current stock price, which is about average for the industry.

Check out our latest analysis for Arbuthnot Banking Group

Arbuthnot Banking Group's Payment Expected To Have Solid Earnings Coverage

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue.

Arbuthnot Banking Group has established itself as a dividend paying company with over 10 years history of distributing earnings to shareholders. Past distributions unfortunately do not guarantee future ones, and Arbuthnot Banking Group's last earnings report actually showed that the company went over its net earnings in its total dividend distribution. This is an alarming sign that could mean that Arbuthnot Banking Group's dividend at its current rate may no longer be sustainable for longer.

Looking forward, earnings per share is forecast by analysts to rise exponentially over the next 3 years. They also estimate that the future payout ratio could reach 28% in the same time horizon, which is in a comfortable range for us.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was £0.24 in 2012, and the most recent fiscal year payment was £0.44. This means that it has been growing its distributions at 6.2% per annum over that time. We like to see dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth May Be Hard To Achieve

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Unfortunately, Arbuthnot Banking Group's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. The company is paying out a lot of its profits, even though it is growing those profits pretty slowly. As they say in finance, 'past performance is not indicative of future performance', but we are not confident a company with limited earnings growth and a high payout ratio will be a star dividend-payer over the next decade.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Arbuthnot Banking Group's payments are rock solid. The track record isn't great, and the payments are a bit high to be considered sustainable. We would be a touch cautious of relying on this stock primarily for the dividend income.