Smurfit Kappa Group's (ISE:SK3) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Smurfit Kappa Group Plc (ISE:SK3) has announced that it will be paying its dividend of €0.316 on the 28th of October, an increased payment from last year's comparable dividend. This makes the dividend yield 4.1%, which is above the industry average.

View our latest analysis for Smurfit Kappa Group

Smurfit Kappa Group's Earnings Easily Cover The Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Prior to this announcement, Smurfit Kappa Group's dividend was only 35% of earnings, however it was paying out 131% of free cash flows. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Looking forward, earnings per share is forecast to rise by 2.9% over the next year. If the dividend continues on this path, the payout ratio could be 38% by next year, which we think can be pretty sustainable going forward.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. The annual payment during the last 10 years was €0.15 in 2012, and the most recent fiscal year payment was €1.28. This works out to be a compound annual growth rate (CAGR) of approximately 24% a year over that time. It is great to see strong growth in the dividend payments, but cuts are concerning as it may indicate the payout policy is too ambitious.

The Dividend Looks Likely To Grow

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. It's encouraging to see that Smurfit Kappa Group has been growing its earnings per share at 16% a year over the past five years. A low payout ratio and decent growth suggests that the company is reinvesting well, and it also has plenty of room to increase the dividend over time.

Our Thoughts On Smurfit Kappa Group's Dividend

In summary, while it's always good to see the dividend being raised, we don't think Smurfit Kappa Group's payments are rock solid. While Smurfit Kappa Group is earning enough to cover the payments, the cash flows are lacking. 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. However, there are other things to consider for investors when analysing stock performance. Just as an example, we've come across 3 warning signs for Smurfit Kappa Group you should be aware of, and 1 of them is a bit unpleasant. Is Smurfit Kappa Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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