Pennon Group (LON:PNN) Is Paying Out A Larger Dividend Than Last Year

July 01, 2022
  •  Updated
July 15, 2022
LSE:PNN
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Pennon Group Plc (LON:PNN) has announced that it will be increasing its dividend on the 5th of September to UK£0.27. This makes the dividend yield 4.0%, which is above the industry average.

See our latest analysis for Pennon Group

Pennon Group Doesn't Earn Enough To Cover Its Payments

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, the company was paying out 781% of what it was earning. This situation certainly isn't ideal, and could place significant strain on the balance sheet if it continues.

EPS is forecast to rise very quickly over the next 12 months. If the dividend continues growing along recent trends, we estimate the payout ratio could reach 178%, which is unsustainable.

historic-dividend
LSE:PNN Historic Dividend July 1st 2022

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. Since 2012, the dividend has gone from UK£0.38 to UK£0.39. Dividend payments have been growing, but very slowly over the 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

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Pennon Group's earnings per share has shrunk at 37% a year over the past five years. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

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. Considering all of these factors, we wouldn't rely on this dividend if we wanted to live on the income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 3 warning signs for Pennon Group (of which 2 shouldn't be ignored!) 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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