Rentokil Initial's (LON:RTO) Dividend Will Be Reduced To UK£0.043

Rentokil Initial plc (LON:RTO) has announced it will be reducing its dividend payable on the 18th of May to UK£0.043. Based on this payment, the dividend yield will be 1.3%, which is lower than the average for the industry.

View our latest analysis for Rentokil Initial

Rentokil Initial's Earnings Easily Cover the Distributions

Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, Rentokil Initial's dividend was comfortably covered by both cash flow and earnings. This means that a large portion of its earnings are being retained to grow the business.

Looking forward, earnings per share is forecast to rise by 10.2% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could be 44% by next year, which is in a pretty sustainable range.

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the dividend has gone from UK£0.02 to UK£0.086. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year 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 Has Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Rentokil Initial has impressed us by growing EPS at 9.1% per year over the past five years. Shareholders are getting plenty of the earnings returned to them, which combined with strong growth makes this quite appealing.

We Really Like Rentokil Initial's Dividend

It is generally not great to see the dividend being cut, but we don't think this should happen much if at all in the future given that Rentokil Initial has the makings of a solid income stock moving forward. The cut will allow the company to continue paying out the dividend without putting the balance sheet under pressure, which means that it could remain sustainable for longer. Taking this all into consideration, this looks like it could be a good dividend opportunity.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for Rentokil Initial that investors should take into consideration. Is Rentokil Initial not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.