The board of Hilton Food Group plc (LON:HFG) has announced that the dividend on 28th of June will be increased to ￡0.23, which will be 1.8% higher than last year's payment of ￡0.226 which covered the same period. This will take the annual payment to 3.7% of the stock price, which is above what most companies in the industry pay.

Check out our latest analysis for Hilton Food Group

Hilton Food Group's Earnings Easily Cover The Distributions

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Prior to this announcement, Hilton Food Group's dividend made up quite a large proportion of earnings but only 27% of free cash flows. 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.

Looking forward, earnings per share is forecast to rise by 35.0% over the next year. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 64% which would be quite comfortable going to take the dividend forward.

Hilton Food Group Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2014, the annual payment back then was ￡0.12, compared to the most recent full-year payment of ￡0.32. This works out to be a compound annual growth rate (CAGR) of approximately 10% a year over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

The Dividend's Growth Prospects Are Limited

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Unfortunately, Hilton Food Group's earnings per share has been essentially flat over the past five years, which means the dividend may not be increased each year. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When a company prefers to pay out cash to its shareholders instead of reinvesting it, this can often say a lot about that company's dividend prospects.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think Hilton Food Group's payments are rock solid. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would be a touch cautious of relying on this stock primarily for the dividend income.