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

The board of Kainos Group plc (LON:KNOS) has announced that the dividend on 15th of December will be increased to £0.082, which will be 5.1% higher than last year's payment of £0.078 which covered the same period. The payment will take the dividend yield to 2.4%, which is in line with the average for the industry.

View our latest analysis for Kainos Group

Kainos Group's Earnings Easily Cover The Distributions

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Before this announcement, Kainos Group was paying out 72% of earnings, but a comparatively small 48% 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.

Looking forward, earnings per share is forecast to rise by 65.3% over the next year. If the dividend continues on this path, the payout ratio could be 30% by next year, which we think can be pretty sustainable going forward.

Kainos Group's Dividend Has Lacked Consistency

Even in its relatively short history, the company has reduced the dividend at least once. This makes us cautious about the consistency of the dividend over a full economic cycle. Since 2015, the dividend has gone from £0.036 total annually to £0.239. This works out to be a compound annual growth rate (CAGR) of approximately 27% a year 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

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Kainos Group has been growing its earnings per share at 25% a 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.

Kainos Group Looks Like A Great Dividend Stock

Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. Earnings are easily covering distributions, and the company is generating plenty of cash. All of these factors considered, we think this has solid potential as a dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 2 warning signs for Kainos Group that you should be aware of before investing. Is Kainos Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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