Kesko Oyj (HEL:KESKOB) Is Increasing Its Dividend To €0.27

Kesko Oyj (HEL:KESKOB) has announced that it will be increasing its dividend from last year's comparable payment on the 28th of June to €0.27. This takes the dividend yield to 6.0%, which shareholders will be pleased with.

Check out our latest analysis for Kesko Oyj

Kesko Oyj's Earnings Easily Cover The Distributions

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, Kesko Oyj was paying out quite a large proportion of both earnings and cash flow, with the dividend being 104% of cash flows. Paying out such a high proportion of cash flows certainly exposes the company to cutting the dividend if cash flows were to reduce.

EPS is set to fall by 2.7% over the next 12 months. If recent patterns in the dividend continue, we could see the payout ratio reaching 83% in the next 12 months, which is on the higher end of the range we would say is sustainable.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was €0.30 in 2013, and the most recent fiscal year payment was €1.08. This means that it has been growing its distributions at 14% 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.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Kesko Oyj has seen EPS rising for the last five years, at 16% per annum. Past earnings growth has been decent, but unless this is one of those rare businesses that can grow without additional capital investment or marketing spend, we'd generally expect the higher payout ratio to limit its future growth prospects.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. Overall, we don't think this company has the makings of a good income stock.

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. To that end, Kesko Oyj has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about. Is Kesko Oyj not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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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.