Kainos Group's (LON:KNOS) Shareholders Will Receive A Bigger Dividend Than Last Year

Kainos Group plc's (LON:KNOS) dividend will be increasing from last year's payment of the same period to £0.161 on 20th of October. This takes the annual payment to 1.8% of the current stock price, which unfortunately is below what the industry is paying.

Check out our latest analysis for Kainos Group

Kainos Group's Dividend Is Well Covered By Earnings

Even a low dividend yield can be attractive if it is sustained for years on end. Prior to this announcement, Kainos Group's dividend made up quite a large proportion of earnings but only 50% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Looking forward, earnings per share is forecast to rise by 46.1% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 31%, which is in the range that makes us comfortable with the sustainability of the dividend.

Kainos Group's Dividend Has Lacked Consistency

Looking back, Kainos Group's dividend hasn't been particularly consistent. This suggests that the dividend might not be the most reliable. The annual payment during the last 7 years was £0.036 in 2016, and the most recent fiscal year payment was £0.239. This implies that the company grew its distributions at a yearly rate of about 31% over that duration. Kainos Group has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Looks Likely To Grow

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. We are encouraged to see that Kainos Group has grown earnings per share at 27% per year over the past five years. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Kainos Group hasn't been doing.

We Really Like Kainos Group's Dividend

Overall, a dividend increase is always good, and we think that Kainos Group is a strong income stock thanks to its track record and growing earnings. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All in all, this checks a lot of the boxes we look for when choosing an income stock.

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. Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 8 analysts we track are forecasting for Kainos Group for free with public analyst estimates for the company. 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.