Royal Mail (LON:RMG) Will Pay A Larger Dividend Than Last Year At UK£0.13

Royal Mail plc (LON:RMG) has announced that it will be increasing its dividend on the 6th of September to UK£0.13. This takes the dividend yield from 9.8% to 15%, which shareholders will be pleased with.

View our latest analysis for Royal Mail

Royal Mail Doesn't Earn Enough To Cover Its Payments

A big dividend yield for a few years doesn't mean much if it can't be sustained. Before making this announcement, Royal Mail was easily earning enough to cover the dividend. This means that most of its earnings are being retained to grow the business.

EPS is set to fall by 47.0% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 104%, which could put the dividend under pressure if earnings don't start to improve.

Royal Mail's Dividend Has Lacked Consistency

Looking back, Royal Mail's dividend hasn't been particularly consistent. Due to this, we are a little bit cautious about the dividend consistency over a full economic cycle. Since 2014, the dividend has gone from UK£0.13 to UK£0.27. This works out to be a compound annual growth rate (CAGR) of approximately 9.1% a year over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Royal Mail has impressed us by growing EPS at 18% per year over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Royal Mail's prospects of growing its dividend payments in the future.

We Really Like Royal Mail'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 generating plenty of cash, and the earnings also quite easily cover the distributions. We should point out that the earnings are expected to fall over the next 12 months, which won't be a problem if this doesn't become a trend, but could cause some turbulence in the next year. 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. However, there are other things to consider for investors when analysing stock performance. To that end, Royal Mail has 3 warning signs (and 1 which is a bit concerning) we think you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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