Diageo plc (LON:DGE) has announced that it will be increasing its dividend from last year's comparable payment on the 20th of October to £0.4682. The payment will take the dividend yield to 2.0%, which is in line with the average for the industry.
Diageo's Payment Has Solid Earnings Coverage
Unless the payments are sustainable, the dividend yield doesn't mean too much. The last dividend was quite easily covered by Diageo's earnings. This means that a large portion of its earnings are being retained to grow the business.
The next year is set to see EPS grow by 38.7%. If the dividend continues along recent trends, we estimate the payout ratio will be 40%, which is in the range that makes us comfortable with the sustainability of the dividend.
Diageo Has A Solid Track Record
The company has an extended history of paying stable dividends. Since 2012, the dividend has gone from £0.404 total annually to £0.762. This works out to be a compound annual growth rate (CAGR) of approximately 6.5% a year over that time. The dividend has been growing very nicely for a number of years, and has given its shareholders some nice income in their portfolios.
We Could See Diageo's Dividend Growing
Investors could be attracted to the stock based on the quality of its payment history. We are encouraged to see that Diageo has grown earnings per share at 5.7% per year over the past five years. The company is paying a reasonable amount of earnings to shareholders, and is growing earnings at a decent rate so we think it could be a decent dividend stock.
We Really Like Diageo's Dividend
Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All in all, this checks a lot of the boxes we look for when choosing an income stock.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Diageo that investors need to be conscious of moving forward. Is Diageo 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.
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