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NatWest Group plc (LON:NWG) has announced that it will be increasing its periodic dividend on the 16th of September to £0.035, which will be 17% higher than last year's comparable payment amount of £0.03. This takes the annual payment to 4.3% of the current stock price, which is about average for the industry.
See our latest analysis for NatWest Group
NatWest Group's Payment Expected To Have Solid Earnings Coverage
We like a dividend to be consistent over the long term, so checking whether it is sustainable is important.
NatWest Group is just starting to establish itself as being able to pay dividends to shareholders, given its short 4-year history of distributing earnings. While NatWest Group's efforts to pay out a dividend can be applauded, its latest earnings report actually shows that the company didn't have enough earnings in the year to cover its dividends. This is an alarming sign that could mean that NatWest Group's dividend may no longer be sustainable for longer.
The next 3 years are set to see EPS grow by 62.3%. Analyst estimates also show the future payout ratio being 36% in the same 3 years which brings it into quite a comfortable range.
NatWest Group's Dividend Has Lacked Consistency
Looking back, the dividend has been unstable but with a relatively short history, we think it may be a bit early to draw conclusions about long term dividend sustainability. The dividend has gone from an annual total of £0.04 in 2018 to the most recent total annual payment of £0.11. This means that it has been growing its distributions at 29% per annum over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.
Dividend Growth Could Be Constrained
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that NatWest Group has grown earnings per share at 36% per year over the past five years. EPS has been growing well, but NatWest Group has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think NatWest Group's payments are rock solid. Strong earnings growth means NatWest Group has the potential to be a good dividend stock in the future, despite the current payments being at elevated levels. We don't think NatWest Group is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 1 warning sign for NatWest Group that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.