Pennon Group Plc's (LON:PNN) dividend will be increasing to UK£0.27 on 5th of September. This takes the dividend yield from 4.0% to 4.0%, which shareholders will be pleased with.

View our latest analysis for Pennon Group

Pennon Group Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, the company's dividend was much higher than its earnings. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

EPS is forecast to rise very quickly over the next 12 months. If the dividend continues growing along recent trends, we estimate the payout ratio could reach 178%, which is unsustainable.

Dividend Volatility

The company's dividend history has been marked by instability, with at least 1 cut in the last 10 years. The dividend has gone from UK£0.38 in 2012 to the most recent annual payment of UK£0.39. Dividend payments have been growing, but very slowly over the period. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Dividend Growth Potential Is Shaky

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Pennon Group's EPS has declined at around 37% 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.

Pennon Group's Dividend Doesn't Look Great

In summary, investors will like to be receiving a higher dividend, but we have some questions about whether it can be sustained over the long term. 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. Considering all of these factors, we wouldn't rely on this dividend if we wanted to live on the income.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. For example, we've identified 3 warning signs for Pennon Group (2 are a bit unpleasant!) that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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