Three reasons why Bunzl's dividend might attract income hunters

High dividend yields play an important role in the total returns that investors get from shares. But when it comes to finding dividend stocks, too much focus on yield alone can risk missing other vital details about a company’s payout – including its growth record.

Many stocks (and even entire industry sectors) have strong histories of dividend growth. That consistency could be a pointer to the kind of financial resilience needed at times when economic pressures might put payouts at risk.

One company with a dividend profile that could be worth a closer look is Diversified Trading amp; Distributing group, Bunzl (LON:BNZL).

A track record of dividend growth

Bunzl is a distribution group with a market cap of £9.55 billion. Over the past year its shares have performed strongly, with relative price strength versus the market of 20.1% – putting it well ahead of its FTSE 100 index. That’s been driven by solid growth and an aggressive acquisition effort. It’s also down to the fact that parts of Bunzl’s distribution business actually benefit from higher inflation as it easily passes those rising costs on to customers.

Shares in Bunzl have a trailing yield of 2.01%. But another important view of the dividend is the company’s payout and earnings track record – including these three factors:

1. It has a solid track record of increasing its dividend payout – which is forecast to continue
2. It also has a good track record of earnings growth to support its dividend
3. Its dividend payout is more than covered by annual earnings

Taking a closer look, Bunzl’s dividend per share has risen 9 times over the past 10 years to its current level of 0.57p. Over five years, the payout has grown at an average compound rate of 6.30%. And from here, it’s currently forecast to grow by 5.78% to 0.61p in the next financial year.

Part of the reason why a solid record of payout hikes is attractive to dividend growth investors is that it can signal a careful but progressive approach by management. Rather than being overgenerous in good years only to cut the payout later on, consistent growth can be a signal of cautious optimism.

One way to analyse a company’s dividend payout record is to cross-check it with the history of earnings growth. Ideally, earnings and dividends should generally be growing in tandem.

At Bunzl, earnings per share have been positive in 10 out of the past 10 years. Over five years, EPS has grown at a compound rate of 9.44%. The company’s trailing EPS stands at 137p and is forecast to grow by 18.2% to 162p in the next financial year.

Earnings progression isn’t just a measure of a healthy business, it’s also crucial to income investors as an indicator of whether a dividend is covered by profits. In this respect, dividend cover (the extent to which a cash payout to shareholders is funded by annual earnings) is a useful safety measure. And in this case, Bunzl has a dividend cover of 2.31, which means that the dividend is more than covered by profits.

A sign of confidence

Overall, Bunzl is a business where the relationship between earnings and dividends looks to have been well managed in the past. While its yield may not always be high enough to capture the interest of some income investors, the growth record in the payout is encouraging. With economic pressures ahead, that kind of financial stability is perhaps an important consideration when it comes to judging whether dividends are safe.

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