SSE (LON:SSE) Is Increasing Its Dividend To UK£0.60

The board of SSE plc ( LON:SSE ) has announced that it will be increasing its dividend on the 22nd of September to UK£0.60. This will take the annual payment to 5.1% of the stock price, which is above what most companies in the industry pay.

See our latest analysis for SSE

SSE's Payment Has Solid Earnings Coverage

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Before making this announcement, SSE's cash payout ratio - the ratio of dividend payments to free cash flow -  was a whopping 530%, but this only made up 35% of its overall earnings. A cash payout ratio this high could put the dividend under pressure and force the company to reduce it in the future if it were to run into tough times.

Over the next year, EPS is forecast to fall by 45.4%. If the dividend continues along recent trends, we estimate the payout ratio could be 64%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

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Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The first annual payment during the last 10 years was UK£0.80 in 2012, and the most recent fiscal year payment was UK£0.86. Dividend payments have been growing, but very slowly over the period. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

SSE Could Grow Its Dividend

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. SSE has seen EPS rising for the last five years, at 8.7% per annum. SSE definitely has the potential to grow its dividend in the future with earnings on an uptrend and a low payout ratio.

Our Thoughts On SSE's Dividend

Overall, we always like to see the dividend being raised, but we don't think SSE will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We would probably look elsewhere for an income investment.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. To that end, SSE has 4 warning signs (and 2 which don't sit too well with us) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield 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.