Pennon Group (LON:PNN) Is Increasing Its Dividend To £0.2977

Pennon Group Plc (LON:PNN) has announced that it will be increasing its dividend from last year's comparable payment on the 4th of September to £0.2977. This will take the dividend yield to an attractive 5.6%, providing a nice boost to shareholder returns.

Check out our latest analysis for Pennon Group

Pennon Group Doesn't Earn Enough To Cover Its Payments

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Pennon Group was paying out 112,152% of what it was earning, and not generating any free cash flows either. This high of a dividend payment could start to put pressure on the balance sheet in the future.

Earnings per share is forecast to rise exponentially over the next year. Assuming the dividend continues along recent trends, we could see the payout ratio reach 135%, which is on the unsustainable side.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the annual payment back then was £0.398, compared to the most recent full-year payment of £0.427. Dividend payments have grown at less than 1% a year over this period. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

The Dividend Has Limited Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Pennon Group's earnings per share has shrunk at 78% a year over the past five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.

Pennon Group's Dividend Doesn't Look Great

In summary, investors will like to be receiving a higher dividend, but we have some questions about whether it can be sustained over the long term. The company's earnings aren't high enough to be making such big distributions, and it isn't backed up by strong growth or consistency either. Overall, the dividend is not reliable enough to make this a good income stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Case in point: We've spotted 3 warning signs for Pennon Group (of which 2 are a bit unpleasant!) you should know about. Is Pennon Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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