3i Group (LON:III) Is Increasing Its Dividend To UK£0.27

The board of 3i Group plc (LON:III) has announced that it will be increasing its dividend on the 22nd of July to UK£0.27. The announced payment will take the dividend yield to 3.6%, which is in line with the average for the industry.

Check out our latest analysis for 3i Group

3i Group's Earnings Easily Cover the Distributions

We aren't too impressed by dividend yields unless they can be sustained over time. However, prior to this announcement, 3i Group was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The business is earning enough to make the dividend feasible, but the cash payout ratio of 91% shows that most of the cash is going back to the shareholders, which could constrain growth prospects going forward.

EPS is set to fall by 51.0% over the next 12 months. If the dividend continues along the path it has been on recently, we estimate the payout ratio could be 28%, which is comfortable for the company to continue in the future.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was UK£0.081 in 2012, and the most recent fiscal year payment was UK£0.47. This works out to be a compound annual growth rate (CAGR) of approximately 19% 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 Looks Likely To Grow

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. It's encouraging to see 3i Group has been growing its earnings per share at 21% a year over the past five years. A low payout ratio gives the company a lot of flexibility, and growing earnings also make it very easy for it to grow the dividend.

Our Thoughts On 3i Group's Dividend

Overall, we always like to see the dividend being raised, but we don't think 3i Group will make a great income stock. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments 3i Group has been making. Overall, we don't think this company has the makings of a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've identified 3 warning signs for 3i Group (2 can't be ignored!) that you should be aware of before investing. 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.