Hensoldt AG (ETR:5UH) will increase its dividend from last year's comparable payment on the 22nd of May to €0.40. Although the dividend is now higher, the yield is only 1.1%, which is below the industry average.

While the dividend yield is important for income investors, it is also important to consider any large share price moves, as this will generally outweigh any gains from distributions. Investors will be pleased to see that Hensoldt's stock price has increased by 43% in the last 3 months, which is good for shareholders and can also explain a decrease in the dividend yield.

See our latest analysis for Hensoldt

Hensoldt's Dividend Is Well Covered By Earnings

If it is predictable over a long period, even low dividend yields can be attractive. Prior to this announcement, Hensoldt's dividend made up quite a large proportion of earnings but only 30% of free cash flows. This leaves plenty of cash for reinvestment into the business.

According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 21%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Hensoldt Is Still Building Its Track Record

The company has maintained a consistent dividend for a few years now, but we would like to see a longer track record before relying on it. The dividend has gone from an annual total of €0.13 in 2021 to the most recent total annual payment of €0.40. This implies that the company grew its distributions at a yearly rate of about 45% over that duration. The dividend has been growing rapidly, however with such a short payment history we can't know for sure if payment can continue to grow over the long term, so caution may be warranted.

Dividend Growth Could Be Constrained

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. Hensoldt has seen EPS rising for the last three years, at 65% per annum. Fast growing earnings are great, but this can rarely be sustained without some reinvestment into the business, which Hensoldt hasn't been doing.

In Summary

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. The company is generating plenty of cash, which could maintain the dividend for a while, but the track record hasn't been great. Overall, we don't think this company has the makings of a good income stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 3 warning signs for Hensoldt that investors should know about before committing capital to this stock. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.