Baby Bunting Group's (ASX:BBN) Upcoming Dividend Will Be Larger Than Last Year's

Baby Bunting Group Limited's (ASX:BBN) dividend will be increasing to AU$0.083 on 10th of September. This takes the annual payment to 2.5% of the current stock price, which unfortunately is below what the industry is paying.

Check out our latest analysis for Baby Bunting Group

Baby Bunting Group's Dividend Is Well Covered By Earnings

If it is predictable over a long period, even low dividend yields can be attractive. Before making this announcement, Baby Bunting Group's dividend was higher than its profits, but the free cash flows quite comfortably covered it. 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.

Looking forward, earnings per share is forecast to rise by 73.7% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 67%, 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

Baby Bunting Group has been paying dividends for a while, but the track record isn't stellar. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The dividend has gone from AU$0.063 in 2016 to the most recent annual payment of AU$0.14. This works out to be a compound annual growth rate (CAGR) of approximately 17% a year over that time. Baby Bunting Group has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Baby Bunting Group's Dividend Might Lack Growth

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. We are encouraged to see that Baby Bunting Group has grown earnings per share at 14% per 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.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. 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 would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign for Baby Bunting Group that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.

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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.
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