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Direct Line Insurance Group plc (LON:DLG) has announced that it will be increasing its dividend on the 17th of May to UK£0.15. This makes the dividend yield 8.3%, which is above the industry average.
Direct Line Insurance Group'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, Direct Line Insurance Group was paying out 93% of earnings, but a comparatively small 74% of free cash flows. This leaves plenty of cash for reinvestment into the business.
EPS is set to grow by 10.9% over the next year. Assuming the dividend continues along recent trends, our estimates say the payout ratio could reach 86%. This is definitely on the higher side, but we wouldn't necessarily say this is unsustainable.
Direct Line Insurance Group's Dividend Has Lacked Consistency
Direct Line Insurance Group has been paying dividends for a while, but the track record isn't stellar. This suggests that the dividend might not be the most reliable. Since 2013, the first annual payment was UK£0.087, compared to the most recent full-year payment of UK£0.23. This means that it has been growing its distributions at 11% per annum 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.
Dividend Growth May Be Hard To Achieve
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. However, Direct Line Insurance Group has only grown its earnings per share at 4.1% per annum over the past five years. Slow growth and a high payout ratio could mean that Direct Line Insurance Group has maxed out the amount that it has been able to pay to shareholders. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.
Our Thoughts On Direct Line Insurance Group's Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. 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. 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Direct Line Insurance Group that you should be aware of before investing. 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.