Baby Bunting Group's (ASX:BBN) Dividend Will Be Increased To AU$0.066

The board of Baby Bunting Group Limited (ASX:BBN) has announced that the dividend on 11th of March will be increased to AU$0.066, which will be 14% higher than last year. Even though the dividend went up, the yield is still quite low at only 2.9%.

View our latest analysis for Baby Bunting Group

Baby Bunting Group's Earnings Easily Cover the Distributions

If it is predictable over a long period, even low dividend yields can be attractive. Prior to this announcement, the company was paying out 105% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 39%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

The next year is set to see EPS grow by 76.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 69%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Baby Bunting Group's Dividend Has Lacked Consistency

It's comforting to see that Baby Bunting Group has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. The first annual payment during the last 6 years was AU$0.063 in 2016, and the most recent fiscal year payment was AU$0.14. This implies that the company grew its distributions at a yearly rate of about 14% over that duration. 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 May Be Hard To Achieve

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see Baby Bunting Group has been growing its earnings per share at 9.0% a year over the past five years. While EPS is growing at a decent rate, but future growth could be limited by the amount of earnings being paid out to shareholders.

Our Thoughts On Baby Bunting Group's Dividend

Overall, we always like to see the dividend being raised, but we don't think Baby Bunting Group will make a great income stock. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. We don't think Baby Bunting Group is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Baby Bunting 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 performing dividend stock.

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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.