Kainos Group's (LON:KNOS) Upcoming Dividend Will Be Larger Than Last Year's

Kainos Group plc (LON:KNOS) will increase its dividend from last year's comparable payment on the 20th of October to £0.161. This takes the annual payment to 2.0% of the current stock price, which unfortunately is below what the industry is paying.

View our latest analysis for Kainos Group

Kainos Group's Earnings Easily Cover The Distributions

While yield is important, another factor to consider about a company's dividend is whether the current payout levels are feasible. Before this announcement, Kainos Group was paying out 71% of earnings, but a comparatively small 50% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.

The next year is set to see EPS grow by 45.5%. 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

Kainos Group has been paying dividends for a while, but the track record isn't stellar. This makes us cautious about the consistency of the dividend over a full economic cycle. The annual payment during the last 8 years was £0.036 in 2015, and the most recent fiscal year payment was £0.239. This means that it has been growing its distributions at 27% per annum 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

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. Kainos Group has impressed us by growing EPS 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

In summary, it is always positive to see the dividend being increased, and we are particularly pleased with its overall sustainability. The company is easily earning enough to cover its dividend payments and it is great to see that these earnings are being translated into cash flow. All of these factors considered, we think this has solid potential as a dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Earnings growth generally bodes well for the future value of company dividend payments. See if the 8 Kainos Group analysts we track are forecasting continued growth with our free report on 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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