Severn Trent (LON:SVT) Will Pay A Larger Dividend Than Last Year At UK£0.61

The board of Severn Trent Plc (LON:SVT) has announced that the dividend on 13th of July will be increased to UK£0.61, which will be 0.5% higher than last year. Based on the announced payment, the dividend yield for the company will be 3.5%, which is fairly typical for the industry.

See our latest analysis for Severn Trent

Severn Trent Might Find It Hard To Continue The Dividend

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Severn Trent isn't generating any profits, and it is paying out a very high proportion of the cash it is earning. This is quite a strong warning sign that the dividend may not be sustainable.

Recent, EPS has fallen by 33.7%, so this could continue over the next year. This means the company won't be turning a profit, which could place managers in the tough spot of having to choose between suspending the dividend or putting more pressure on the balance sheet.

Severn Trent Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the first annual payment was UK£0.70, compared to the most recent full-year payment of UK£1.02. This works out to be a compound annual growth rate (CAGR) of approximately 3.8% a year over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

The Dividend Has Limited Growth Potential

Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Unfortunately things aren't as good as they seem. Severn Trent's earnings per share has shrunk at 34% 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, we always like to see the dividend being raised, but we don't think Severn Trent will make a great income stock. 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. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 2 warning signs for Severn Trent that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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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.