The board of Endeavour Group Limited (ASX:EDV) has announced that it will pay a dividend on the 10th of October, with investors receiving A$0.075 per share. This payment means that the dividend yield will be 4.1%, which is around the industry average.

Check out our latest analysis for Endeavour Group

Endeavour Group's Dividend Is Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Before this announcement, Endeavour Group was paying out 76% of earnings, but a comparatively small 50% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Earnings per share is forecast to rise by 13.1% over the next year. If recent patterns in the dividend continues, the payout ratio in 12 months could be 78% which is a bit high but can definitely be sustainable.

Endeavour Group's Dividend Has Lacked Consistency

Looking back, the dividend has been unstable but with a relatively short history, we think it may be a bit early to draw conclusions about long term dividend sustainability. The dividend has gone from an annual total of A$0.07 in 2021 to the most recent total annual payment of A$0.218. This works out to be a compound annual growth rate (CAGR) of approximately 46% a year over that time. Endeavour Group has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

Dividend Growth May Be Hard To Achieve

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. However, Endeavour Group has only grown its earnings per share at 4.8% per annum over the past three years. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.

In Summary

Overall, it's nice to see a consistent dividend payment, but we think that longer term, the current level of payment might be unsustainable. 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. This company is not in the top tier of income providing stocks.