Bodycote's (LON:BOY) Shareholders Will Receive A Bigger Dividend Than Last Year

Bodycote plc's (LON:BOY) dividend will be increasing from last year's payment of the same period to £0.149 on 2nd of June. This will take the dividend yield to an attractive 3.5%, providing a nice boost to shareholder returns.

Check out our latest analysis for Bodycote

Bodycote's Dividend Is Well Covered By Earnings

A big dividend yield for a few years doesn't mean much if it can't be sustained. The last dividend was quite easily covered by Bodycote's earnings. This means that a large portion of its earnings are being retained to grow the business.

The next year is set to see EPS grow by 39.4%. If the dividend continues on this path, the payout ratio could be 41% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of £0.109 in 2013 to the most recent total annual payment of £0.213. This works out to be a compound annual growth rate (CAGR) of approximately 6.9% a year over that time. It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Bodycote might have put its house in order since then, but we remain cautious.

Dividend Growth Is Doubtful

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Bodycote's EPS has declined at around 5.4% a year. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Bodycote that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield 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.