Legal & General Group's (LON:LGEN) Upcoming Dividend Will Be Larger Than Last Year's

The board of Legal & General Group Plc (LON:LGEN) has announced that it will be increasing its dividend by 5.0% on the 5th of June to £0.1536, up from last year's comparable payment of £0.146. This takes the dividend yield to 9.4%, which shareholders will be pleased with.

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Legal & General Group's Projected Earnings Seem Likely To Cover Future Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before this announcement, Legal & General Group was paying out 740% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.

The next 12 months could see EPS growing very rapidly. If the dividend continues along recent trends, we estimate the payout ratio could reach 80%, which is on the higher side, but certainly feasible.

See our latest analysis for Legal & General Group

Legal & General Group Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2015, the annual payment back then was £0.093, compared to the most recent full-year payment of £0.214. This implies that the company grew its distributions at a yearly rate of about 8.7% over that duration. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

Dividend Growth Potential Is Shaky

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, things aren't all that rosy. Over the past five years, it looks as though Legal & General Group's EPS has declined at around 37% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Legal & General Group will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would probably look elsewhere for an income investment.

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. Just as an example, we've come across 2 warning signs for Legal & General Group you should be aware of, and 1 of them is a bit unpleasant. Is Legal & General Group 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.