Compass Group (LON:CPG) Is Paying Out A Larger Dividend Than Last Year

The board of Compass Group PLC (LON:CPG) has announced that it will be increasing its dividend by 60% on the 27th of July to £0.15, up from last year's comparable payment of £0.094. The payment will take the dividend yield to 1.5%, which is in line with the average for the industry.

View our latest analysis for Compass Group

Compass Group's Dividend Is Well Covered By Earnings

Unless the payments are sustainable, the dividend yield doesn't mean too much. Based on the last payment, Compass Group 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.

The next year is set to see EPS grow by 50.4%. If the dividend continues along recent trends, we estimate the payout ratio will be 33%, which is in the range that makes us comfortable with the sustainability of the dividend.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The annual payment during the last 10 years was £0.221 in 2013, and the most recent fiscal year payment was £0.315. This works out to be a compound annual growth rate (CAGR) of approximately 3.6% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

Compass Group May Find It Hard To Grow The Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. However, Compass Group's EPS was effectively flat over the past five years, which could stop the company from paying more every year. Compass Group is struggling to find viable investments, so it is returning more to shareholders. While this isn't necessarily a negative, it definitely signals that dividend growth could be constrained in the future unless earnings start to pick up again.

Our Thoughts On Compass Group's Dividend

Overall, it's great to see the dividend being raised and that it is still in a sustainable range. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 2 warning signs for Compass Group that investors should take into consideration. Is Compass Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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