Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Bakkavor Group plc (LON:BAKK) has begun paying dividends recently. It now yields 5.1%. Does Bakkavor Group tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
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5 checks you should use to assess a dividend stock
Whenever I am looking at a potential dividend stock investment, I always check these five metrics:
Is its annual yield among the top 25% of dividend-paying companies?
Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
Has the amount of dividend per share grown over the past?
Is is able to pay the current rate of dividends from its earnings?
Will the company be able to keep paying dividend based on the future earnings growth?
How well does Bakkavor Group fit our criteria?
Bakkavor Group has a trailing twelve-month payout ratio of 52%, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect BAKK’s payout to fall to 42% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 5.1%. However, EPS should increase to £0.13, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.
If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Unfortunately, it is really too early to view Bakkavor Group as a dividend investment. Last year was the company’s first dividend payment, so it is certainly early days. The standard practice for reliable payers is to look for 10 or so years of track record.
Compared to its peers, Bakkavor Group produces a yield of 5.1%, which is high for Food stocks but still below the market’s top dividend payers.
If Bakkavor Group is in your portfolio for cash-generating reasons, there may be better alternatives out there. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three essential factors you should further research:
Future Outlook: What are well-informed industry analysts predicting for BAKK’s future growth? Take a look at our free research report of analyst consensus for BAKK’s outlook.
Valuation: What is BAKK worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether BAKK is currently mispriced by the market.
Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.