The board of Inghams Group Limited (ASX:ING) has announced that it will pay a dividend on the 4th of April, with investors receiving A$0.11 per share. However, the dividend yield of 5.8% is still a decent boost to shareholder returns.

See our latest analysis for Inghams Group

Inghams Group's Projected Earnings Seem Likely To Cover Future Distributions

Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before this announcement, Inghams Group was paying out 79% of earnings, but a comparatively small 25% of free cash flows. This leaves plenty of cash for reinvestment into the business.

The next year is set to see EPS grow by 38.3%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 59% which would be quite comfortable going to take the dividend forward.

Inghams Group's Dividend Has Lacked Consistency

It's comforting to see that Inghams Group has been paying a dividend for a number of years now, however it has been cut at least once in that time. This suggests that the dividend might not be the most reliable. The annual payment during the last 8 years was A$0.052 in 2017, and the most recent fiscal year payment was A$0.20. This works out to be a compound annual growth rate (CAGR) of approximately 18% 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.

We Could See Inghams Group's Dividend Growing

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Inghams Group has impressed us by growing EPS at 5.7% per year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

In Summary

Overall, the dividend looks like it may have been a bit high, which explains why it has now been cut. 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 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. To that end, Inghams Group has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about. Is Inghams Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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