Lok'nStore Group (LON:LOK) Will Pay A Larger Dividend Than Last Year At UK£0.05

Lok'nStore Group Plc's (LON:LOK) dividend will be increasing on the 10th of June to UK£0.05, with investors receiving 15% more than last year. Although the dividend is now higher, the yield is only 1.6%, which is below the industry average.

View our latest analysis for Lok'nStore Group

Lok'nStore Group's Dividend Is Well Covered By Earnings

It would be nice for the yield to be higher, but we should also check if higher levels of dividend payment would be sustainable. Based on the last payment, earnings were actually smaller than the dividend, and the company was actually spending more cash than it was making. Paying out such a large dividend compared to earnings while also not generating any free cash flow would definitely be difficult to keep up.

According to analysts, EPS should be several times higher next year. If recent patterns in the dividend continue, we could see the payout ratio reaching 41% which is fairly sustainable.

Lok'nStore Group Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2012, the dividend has gone from UK£0.03 to UK£0.15. This implies that the company grew its distributions at a yearly rate of about 17% over that duration. We can see that payments have shown some very nice upward momentum without faltering, which provides some reassurance that future payments will also be reliable.

Dividend Growth Is Doubtful

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. In the last five years, Lok'nStore Group's earnings per share has shrunk at approximately 7.6% per annum. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

The Dividend Could Prove To Be Unreliable

Overall, we always like to see the dividend being raised, but we don't think Lok'nStore 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 don't think Lok'nStore Group is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 1 warning sign for Lok'nStore Group that investors should know about before committing capital to this stock. 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.