Diageo plc's (LON:DGE) dividend will be increasing from last year's payment of the same period to £0.3083 on 13th of April. This takes the annual payment to 2.3% of the current stock price, which is about average for the industry.
See our latest analysis for Diageo
Diageo's Payment Has Solid Earnings Coverage
Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, Diageo 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 85% indicates it is more focused on returning cash to shareholders than growing the business.
Looking forward, earnings per share is forecast to rise by 33.7% over the next year. If the dividend continues on this path, the payout ratio could be 38% by next year, which we think can be pretty sustainable going forward.
Diageo Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. Since 2013, the dividend has gone from £0.415 total annually to £0.777. This works out to be a compound annual growth rate (CAGR) of approximately 6.5% a year over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.
Diageo May Find It Hard To Grow The Dividend
Investors could be attracted to the stock based on the quality of its payment history. Earnings have grown at around 4.4% a year for the past five years, which isn't massive but still better than seeing them shrink. Growth of 4.4% may indicate that the company has limited investment opportunity so it is returning its earnings to shareholders instead. This isn't necessarily bad, but we wouldn't expect rapid dividend growth in the future.
Our Thoughts On Diageo's Dividend
In summary, while it's always good to see the dividend being raised, we don't think Diageo's payments are rock solid. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Diageo has been making. We would be a touch cautious of relying on this stock primarily for the dividend income.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. 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 Diageo that investors should take into consideration. Is Diageo not quite the opportunity you were looking for? Why not check out our selection of top 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.
About LSE:DGE
Diageo
Engages in the production, marketing, and sale of alcoholic beverages.
Established dividend payer and good value.
