3i Group (LON:III) Has Announced That It Will Be Increasing Its Dividend To £0.345

3i Group plc (LON:III) will increase its dividend from last year's comparable payment on the 26th of July to £0.345. Although the dividend is now higher, the yield is only 2.1%, which is below the industry average.

Check out our latest analysis for 3i Group

3i Group's Payment Has Solid Earnings Coverage

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Prior to this announcement, 3i Group's dividend was only 15% of earnings, however it was paying out 162% of free cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Looking forward, earnings per share is forecast to rise by 24.5% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 15%, which is in the range that makes us comfortable with the sustainability of the dividend.

3i Group Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2014, the annual payment back then was £0.081, compared to the most recent full-year payment of £0.61. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. Rapidly growing dividends for a long time is a very valuable feature for an income stock.

The Dividend Looks Likely To Grow

Investors could be attracted to the stock based on the quality of its payment history. 3i Group has impressed us by growing EPS at 25% per year over the past five years. Earnings per share is growing at a solid clip, and the payout ratio is low which we think is an ideal combination in a dividend stock as the company can quite easily raise the dividend in the future.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While 3i Group is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for 3i Group that investors need to be conscious of moving forward. 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.