Donegal Group (NASDAQ:DGIC.A) Has Announced That It Will Be Increasing Its Dividend To US$0.17

Donegal Group Inc.'s (NASDAQ:DGIC.A) dividend will be increasing on the 16th of May to US$0.17, with investors receiving 3.1% more than last year. This makes the dividend yield 4.7%, which is above the industry average.

See our latest analysis for Donegal Group

Donegal Group's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last payment made up 77% of earnings, but cash flows were much higher. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Looking forward, earnings per share is forecast to rise by 31.8% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 62%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Donegal 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 US$0.48 in 2012 to the most recent annual payment of US$0.64. This means that it has been growing its distributions at 2.9% per annum 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 May Be Hard To Come By

The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. Over the past five years, it looks as though Donegal Group's EPS has declined at around 7.1% a year. A modest decline in earnings isn't great, and it makes it quite unlikely that the dividend will grow in the future unless that trend can be reversed. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Donegal Group's payments are rock solid. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would be a touch cautious of relying on this stock primarily for the dividend income.

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. Taking the debate a bit further, we've identified 2 warning signs for Donegal Group that investors need to be conscious of moving forward. Is Donegal Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.