United Utilities Group's (LON:UU.) Dividend Will Be Increased To UK£0.29

The board of United Utilities Group PLC (LON:UU.) has announced that it will be increasing its dividend on the 1st of August to UK£0.29. This makes the dividend yield 4.2%, which is above the industry average.

Check out our latest analysis for United Utilities Group

United Utilities Group's Distributions May Be Difficult To Sustain

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. United Utilities Group is unprofitable despite paying a dividend, and it is paying out 98% of its free cash flow. This makes us feel that the dividend will be hard to maintain.

Recent, EPS has fallen by 27.5%, so this could continue over the next year. 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.

United Utilities Group Has A Solid Track Record

The company has an extended history of paying stable dividends. The dividend has gone from UK£0.31 in 2012 to the most recent annual payment of UK£0.43. This works out to be a compound annual growth rate (CAGR) of approximately 3.6% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Dividend Growth Potential Is Shaky

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, things aren't all that rosy. Earnings per share has been sinking by 28% over the last 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 United Utilities Group will make a great income stock. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 2 warning signs for United Utilities Group that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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