The board of Unitil Corporation (NYSE:UTL) has announced that it will be increasing its dividend by 5.6% on the 27th of February to $0.475, up from last year's comparable payment of $0.45. The payment will take the dividend yield to 3.5%, which is in line with the average for the industry.

Unitil's Projected Earnings Seem Likely To Cover Future Distributions

While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Unitil's earnings easily covered the dividend, but free cash flows were negative. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.

Over the next year, EPS is forecast to expand by 3.5%. If the dividend continues on this path, the payout ratio could be 69% by next year, which we think can be pretty sustainable going forward.

Unitil Has A Solid Track Record

The company has an extended history of paying stable dividends. The annual payment during the last 10 years was $1.40 in 2016, and the most recent fiscal year payment was $1.80. This works out to be a compound annual growth rate (CAGR) of approximately 2.5% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.

Unitil Could Grow Its Dividend

The company's investors will be pleased to have been receiving dividend income for some time. Unitil has seen EPS rising for the last five years, at 5.3% per annum. The company is paying out a lot of its cash as a dividend, but it looks okay based on the payout ratio.

An additional note is that the company has been raising capital by issuing stock equal to 11% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Unitil will make a great income stock. With cash flows lacking, it is difficult to see how the company can sustain a dividend payment. We don't think Unitil is a great stock to add to your portfolio if income is your focus.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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.