In This Article:
United Utilities Group PLC (LON:UU.) has announced that it will be increasing its dividend from last year's comparable payment on the 1st of August to £0.3457. This takes the dividend yield to 4.7%, which shareholders will be pleased with.
United Utilities Group's Payment Could Potentially Have Solid Earnings Coverage
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the dividend made up 134% of earnings, and the company was generating negative free cash flows. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
Over the next year, EPS is forecast to expand by 113.1%. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 65% which brings it into quite a comfortable range.
See our latest analysis for United Utilities Group
United Utilities Group Has A Solid Track Record
The company has an extended history of paying stable dividends. Since 2015, the annual payment back then was £0.36, compared to the most recent full-year payment of £0.519. This works out to be a compound annual growth rate (CAGR) of approximately 3.7% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
United Utilities Group Might Find It Hard To Grow Its Dividend
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. It's encouraging to see that United Utilities Group has been growing its earnings per share at 20% a year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.
United Utilities Group's Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think United Utilities Group will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We don't think United Utilities Group is a great stock to add to your portfolio if income is your focus.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for United Utilities Group that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.