Kellogg's (NYSE:K) Upcoming Dividend Will Be Larger Than Last Year's

Kellogg Company (NYSE:K) has announced that it will be increasing its dividend from last year's comparable payment on the 15th of September to $0.60. This makes the dividend yield 3.9%, which is above the industry average.

Check out our latest analysis for Kellogg

Kellogg's Dividend Is Well Covered By Earnings

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. The last dividend made up a very large portion of earnings and also represented 88% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but it is still in a reasonable range to continue with.

Looking forward, earnings per share is forecast to rise by 82.9% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 53% which brings it into quite a comfortable range.

Kellogg 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 $1.76 in 2013 to the most recent total annual payment of $2.40. This means that it has been growing its distributions at 3.2% per annum over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.

The Dividend Has Limited Growth Potential

The company's investors will be pleased to have been receiving dividend income for some time. Unfortunately things aren't as good as they seem. Over the past five years, it looks as though Kellogg's EPS has declined at around 13% a year. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. On the bright side, earnings are predicted to gain some ground over the next year, but until this turns into a pattern we wouldn't be feeling too comfortable.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Kellogg's payments are rock solid. Although they have been consistent in the past, we think the payments are a little high to be sustained. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 3 warning signs for Kellogg that you should be aware of before investing. Is Kellogg not quite the opportunity you were looking for? Why not check out our selection of top 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.