United Utilities Group (LON:UU.) Is Paying Out A Larger Dividend Than Last Year

United Utilities Group PLC (LON:UU.) has announced that it will be increasing its dividend from last year's comparable payment on the 1st of August to £0.3319. This will take the dividend yield to an attractive 4.9%, providing a nice boost to shareholder returns.

View our latest analysis for United Utilities Group

United Utilities Group's Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the dividend made up 267% of earnings, and the company was generating negative free cash flows. This high of a dividend payment could start to put pressure on the balance sheet in the future.

Analysts expect a massive rise in earnings per share in the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 74%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

United Utilities Group 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. The dividend has gone from an annual total of £0.343 in 2014 to the most recent total annual payment of £0.498. This implies that the company grew its distributions at a yearly rate of about 3.8% over that duration. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Potential Is Shaky

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. United Utilities Group's earnings per share has shrunk at 19% 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. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.

United Utilities Group's Dividend Doesn't Look Sustainable

Overall, we always like to see the dividend being raised, but we don't think United Utilities Group will make a great income stock. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 United Utilities Group (of which 2 can't be ignored!) you should know about. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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