QinetiQ Group plc (LON:QQ.) has announced that it will be increasing its periodic dividend on the 2nd of February to £0.026, which will be 8.3% higher than last year's comparable payment amount of £0.024. This makes the dividend yield about the same as the industry average at 2.4%.

View our latest analysis for QinetiQ Group

QinetiQ Group's Dividend Is Well Covered By Earnings

Unless the payments are sustainable, the dividend yield doesn't mean too much. Prior to this announcement, QinetiQ Group was quite comfortably covering its dividend with earnings and it was paying more than 75% of its free cash flow to shareholders. The company is clearly earning enough to pay this type of dividend, but it is definitely focused on returning cash to shareholders, rather than growing the business.

The next year is set to see EPS grow by 60.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 28%, which is in the range that makes us comfortable with the sustainability of the dividend. historic-dividend

QinetiQ Group Has A Solid Track Record

Even over a long history of paying dividends, the company's distributions have been remarkably stable. The dividend has gone from an annual total of £0.031 in 2013 to the most recent total annual payment of £0.077. This works out to be a compound annual growth rate (CAGR) of approximately 9.5% a year over that time. The growth of the dividend has been pretty reliable, so we think this can offer investors some nice additional income in their portfolio.

QinetiQ Group May Find It Hard To Grow The Dividend

The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. In the last five years, QinetiQ Group's earnings per share has shrunk at approximately 3.1% per annum. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. Earnings are predicted to grow over the next year, but we would remain cautious until a track record of earnings growth is established.



In Summary

In summary, while it's always good to see the dividend being raised, we don't think QinetiQ Group's payments are rock solid. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments QinetiQ Group has been making. Overall, we don't think this company has the makings of a good income stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. 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 QinetiQ 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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