BAE Systems (LON:BA.) Is Increasing Its Dividend To UK£0.15

BAE Systems plc's (LON:BA.) dividend will be increasing to UK£0.15 on 1st of June. This takes the annual payment to 3.3% of the current stock price, which is about average for the industry.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that BAE Systems' stock price has increased by 31% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for BAE Systems

BAE Systems' Earnings Easily Cover the Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. Based on the last payment, BAE Systems was quite comfortably earning enough to cover the dividend. This means that a large portion of its earnings are being retained to grow the business.

Over the next year, EPS is forecast to fall by 12.1%. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 53%, which is comfortable for the company to continue in the future.

BAE Systems Has A Solid Track Record

The company has a sustained record of paying dividends with very little fluctuation. The first annual payment during the last 10 years was UK£0.19 in 2012, and the most recent fiscal year payment was UK£0.25. This works out to be a compound annual growth rate (CAGR) of approximately 2.9% a year over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.

The Dividend Looks Likely To Grow

Investors could be attracted to the stock based on the quality of its payment history. BAE Systems has seen EPS rising for the last five years, at 14% per annum. Earnings are on the uptrend, and it is only paying a small portion of those earnings to shareholders.

We Really Like BAE Systems' Dividend

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The distributions are easily covered by earnings, and there is plenty of cash being generated as well. However, it is worth noting that the earnings are expected to fall over the next year, which may not change the long term outlook, but could affect the dividend payment in the next 12 months. All in all, this checks a lot of the boxes we look for when choosing an 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. For example, we've picked out 1 warning sign for BAE Systems that investors should know about before committing capital to this stock. Is BAE Systems 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.