The board of Bodycote plc (LON:BOY) has announced that the dividend on 3rd of June will be increased to UK£0.14, which will be 3.0% higher than last year. This takes the dividend yield from 2.9% to 2.9%, which shareholders will be pleased with.

Check out our latest analysis for Bodycote

Bodycote's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. The last dividend was quite easily covered by Bodycote's earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.

The next year is set to see EPS grow by 23.7%. Assuming the dividend continues along recent trends, we think the payout ratio could be 54% by next year, which is in a pretty sustainable range.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the first annual payment was UK£0.11, compared to the most recent full-year payment of UK£0.20. This means that it has been growing its distributions at 6.3% per annum over that time. We have seen cuts in the past, so while the growth looks promising we would be a little bit cautious about its track record.

The Dividend's Growth Prospects Are Limited

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. Over the past five years, it looks as though Bodycote's EPS has declined at around 2.4% a year. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. 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 Bodycote's payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. This company is not in the top tier of income providing stocks.

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. Taking the debate a bit further, we've identified 2 warning signs for Bodycote that investors need to be conscious of moving forward. Is Bodycote not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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