Severn Trent (LON:SVT) Is Paying Out A Larger Dividend Than Last Year

The board of Severn Trent Plc (LON:SVT) has announced that the dividend on 7th of January will be increased to UK£0.41, which will be 0.6% higher than last year. This will take the dividend yield from 3.5% to 3.5%, providing a nice boost to shareholder returns.

See our latest analysis for Severn Trent

Severn Trent's Distributions May Be Difficult To Sustain

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Even while not generating a profit, Severn Trent is paying out most of its free cash flows as a dividend. Generally paying a dividend without making profits isn't a great idea and we are also worried that there is limited reinvestment into the business.

Looking forward, earnings per share could 23.4% over the next year if the trend of the last few years can't be broken. This will push the company into unprofitability, which means the managers will have to choose between suspending the dividend, or paying it out of cash reserves.

Severn Trent Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The first annual payment during the last 10 years was UK£0.70 in 2011, and the most recent fiscal year payment was UK£1.02. This works out to be a compound annual growth rate (CAGR) of approximately 3.8% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

Dividend Growth Potential Is Shaky

Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren't as good as they seem. Severn Trent's earnings per share has shrunk at 23% 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.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. Although they have been consistent in the past, we think the payments are a little high to be sustained. We don't think Severn Trent is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Severn Trent has 3 warning signs (and 1 which is significant) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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