Inghams Group Limited (ASX: ING) will increase its dividend on October 6 to AU $ 0.09. This will take the dividend yield from 4.0% to 4.0%, which will give shareholders returns a big boost.
See our latest analysis for Inghams Group
Inghams group payment has strong revenue coverage
We like to see robust dividend yields, but it doesn’t matter if the payout isn’t sustainable. Prior to this announcement, Inghams Group’s dividend represented a fairly large share of earnings but only 17% of free cash flow. This leaves a lot of money to reinvest in the business.
Going forward, earnings per share are expected to increase by 14.5% over the next year. Assuming the dividend continues on recent trends, we think the payout ratio could be 71% by next year, which is in a fairly sustainable range.
Inghams Group’s dividend was inconsistent
Looking back, Inghams Group’s dividend has not been particularly consistent. For this reason, we are a little cautious about the consistency of dividends over a full economic cycle. The dividend went from AU $ 0.052 in 2016 to the last annual payment of AU $ 0.17. This means that he increased his distributions by 26% per year during that period. Despite the rapid growth of the dividend over the past few years, we have also seen payouts decline in the past, which makes us cautious.
The dividend seems likely to increase
Since the dividend has been reduced in the past, we need to check if the profits are increasing and if this could lead to higher dividends in the future. Inghams Group has impressed us by increasing EPS by 22% per year over the past five years. EPS is growing rapidly, although the company also pays out a large portion of its profits as dividends. If profits continue to grow, the dividend may be sustainable, but in general we would prefer a fast growing company to reinvest in new growth.
We really like the Inghams Group dividend
Overall, a dividend increase is always good, and we believe Inghams Group is a solid income stock thanks to its track record and growing earnings. The company easily earns enough to cover its dividend payments and it’s great to see that those profits translate into cash flow. Overall, this ticks a lot of the boxes that we look for when choosing an income stock.
Investors generally tend to favor companies with a consistent and stable dividend policy over those that operate irregularly. Meanwhile, despite the importance of dividend payments, they aren’t the only factors our readers should be aware of when valuing a business. For example, we have identified 2 warning signs for Inghams Group (1 is a concern!) That you should know before investing. If you are a dividend investor, you can also view our curated list of high performing dividend stocks.
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