Keurig Dr Pepper Inc. (NASDAQ:KDP) has announced that it will be increasing its periodic dividend on the 13th of October to $0.215, which will be 7.5% higher than last year's comparable payment amount of $0.20. This makes the dividend yield about the same as the industry average at 2.4%.
Keurig Dr Pepper's Earnings Easily Cover The Distributions
Unless the payments are sustainable, the dividend yield doesn't mean too much. The last payment made up 70% of earnings, but cash flows were much higher. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Over the next year, EPS is forecast to expand by 63.7%. Assuming the dividend continues along recent trends, we think the payout ratio could be 42% by next year, which is in a pretty sustainable range.
Keurig Dr Pepper Is Still Building Its Track Record
Keurig Dr Pepper's dividend has been pretty stable for a little while now, but we will continue to be cautious until it has been demonstrated for a few more years. Since 2018, the annual payment back then was $0.60, compared to the most recent full-year payment of $0.80. This works out to be a compound annual growth rate (CAGR) of approximately 5.9% a year over that time. Keurig Dr Pepper has a nice track record of dividend growth but we would wait until we see a longer track record before getting too confident.
The Dividend Has Limited Growth Potential
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Let's not jump to conclusions as things might not be as good as they appear on the surface. Keurig Dr Pepper's earnings per share has shrunk at 60% 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. It's not all bad news though, as the earnings are predicted to rise over the next 12 months - we would just be a bit cautious until this becomes a long term trend.
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. 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, Keurig Dr Pepper has 4 warning signs (and 1 which makes us a bit uncomfortable) 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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