The board of Bakkavor Group plc (LON:BAKK) has announced that the dividend on 13th of October will be increased to £0.0291, which will be 5.1% higher than last year's payment of £0.0277 which covered the same period. This will take the dividend yield to an attractive 6.9%, providing a nice boost to shareholder returns.

See our latest analysis for Bakkavor Group

Bakkavor Group Is Paying Out More Than It Is Earning

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, the company was paying out 337% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 60%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.

Over the next year, EPS is forecast to expand by 142.4%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 155%, which probably can't continue without putting some pressure on the balance sheet. historic-dividend

Bakkavor Group's Dividend Has Lacked Consistency

Bakkavor Group has been paying dividends for a while, but the track record isn't stellar. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. The dividend has gone from an annual total of £0.04 in 2018 to the most recent total annual payment of £0.0693. This works out to be a compound annual growth rate (CAGR) of approximately 12% a year over that time. Dividends have grown rapidly over this time, but with cuts in the past we are not certain that this stock will be a reliable source of income in the future.

The Dividend Has Limited Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. Bakkavor Group's earnings per share has shrunk at 29% a year over the past five years. This steep decline can indicate that the business is going through a tough time, which could constrain its ability to pay a larger dividend each year in the future. 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.



Bakkavor Group's Dividend Doesn't Look Sustainable

In summary, while it's always good to see the dividend being raised, we don't think Bakkavor Group's payments are rock solid. The payments haven't been particularly stable and we don't see huge growth potential, but with the dividend well covered by cash flows it could prove to be reliable over the short term. We don't think Bakkavor Group is a great stock to add to your portfolio if income is your focus.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 4 warning signs for Bakkavor Group that investors should know about before committing capital to this stock. Is Bakkavor Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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