Pennon Group (LON:PNN) Is Increasing Its Dividend To £0.3033

Pennon Group Plc (LON:PNN) has announced that it will be increasing its periodic dividend on the 5th of September to £0.3033, which will be 1.9% higher than last year's comparable payment amount of £0.298. This will take the annual payment to 6.5% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for Pennon Group

Pennon Group Is Paying Out More Than It Is Earning

A big dividend yield for a few years doesn't mean much if it can't be sustained. Even though Pennon Group is not generating a profit, it is still paying a dividend. Along with this, it is also not generating free cash flows, which raises concerns about the sustainability of the dividend.

Earnings per share is forecast to rise by 164.8% over the next year. If the dividend continues on its recent course, the company could be paying out several times what it earns in the next 12 months, which could start applying pressure to the balance sheet.

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The dividend has gone from an annual total of £0.455 in 2014 to the most recent total annual payment of £0.444. Dividend payments have shrunk at a rate of less than 1% per annum over this time frame. Generally, we don't like to see a dividend that has been declining over time as this can degrade shareholders' returns and indicate that the company may be running into problems.

Dividend Growth Potential Is Shaky

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Pennon Group's EPS has fallen by approximately 57% per year during the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

Pennon Group's Dividend Doesn't Look Great

In conclusion, we have some concerns about this dividend, even though it being raised is good. The company seems to be stretching itself a bit to make such big payments, but it doesn't appear they can be consistent over time. Overall, this doesn't get us very excited from an income standpoint.

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. Just as an example, we've come across 3 warning signs for Pennon Group you should be aware of, and 2 of them shouldn't be ignored. 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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