Yahoo Finance Severn Trent (LON:SVT) Has Announced That It Will Be Increasing Its Dividend To £0.701
The board of Severn Trent PLC (LON:SVT) has announced that it will be paying its dividend of £0.701 on the 17th of July, an increased payment from last year's comparable dividend. This will take the annual payment to 4.8% of the stock price, which is above what most companies in the industry pay.
Check out our latest analysis for Severn Trent
Severn Trent's Dividend Is Well Covered By Earnings
While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, Severn Trent was paying out 169% of what it was earning, and not generating any free cash flows either. Paying out such a large dividend compared to earnings while also not generating free cash flows is a major warning sign for the sustainability of the dividend as these levels are certainly a bit high.
According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 66%, which is in a comfortable range for us.
Severn Trent Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The annual payment during the last 10 years was £0.804 in 2014, and the most recent fiscal year payment was £1.17. This implies that the company grew its distributions at a yearly rate of about 3.8% over that duration. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.
Dividend Growth Potential Is Shaky
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Let's not jump to conclusions as things might not be as good as they appear on the surface. Earnings per share has been sinking by 19% over the last five years. A sharp decline in earnings per share is not great from from a dividend perspective. Even conservative payout ratios can come under pressure if earnings fall far enough. Over the next year, however, earnings are actually predicted to rise, but we would still be cautious until a track record of earnings growth can be built.
We should note that Severn Trent has issued stock equal to 19% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
Severn Trent's Dividend Doesn't Look Sustainable
Overall, we always like to see the dividend being raised, but we don't think Severn Trent will make a great income stock. Although they have been consistent in the past, we think the payments are a little high to be sustained. Overall, we don't think this company has the makings of a good 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. However, there are other things to consider for investors when analysing stock performance. To that end, Severn Trent has 3 warning signs (and 2 which are a bit concerning) we think you should know about. Is Severn Trent 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.
