When looking for profitable dividend shares, I typically examine the yield and price histories. For the reason that yield’s a proportion of the price, the 2 metrics are normally inversely correlated to a level. Variations on this correlation can provide me deeper insights into how the corporate manages its dividends.

If the corporate maintains a gentle dividend, the yield falls because the price rises. Ideally, I search for a yield that is still secure, indicating a gentle improve in dividend funds in keeping with price progress. These kinds of shares could make dependable additions to a passive revenue portfolio.

Looking the FTSE 250 index, one inventory caught my eye that may very well be promising. So I made a decision to peek below the hood.

A lesser-known utility group

Pennon Group‘s (LSE: PNN) a £1.6bn water and waste management company better known by its subsidiaries, including South West Water and Bristol Water. Founded in 1989, it’s comparatively younger in comparison with most UK utility corporations.

I like utility corporations as a result of their regulated enterprise fashions and important providers present a level of stability and resilience. Currently, many have been struggling, and even main suppliers like Nationwide Grid and Severn Trent have suffered losses. Pennon’s share price has been in decline since mid-2021, now down by nearly 60% in 5 years.

On the face of issues, that doesn’t look nice. However issues could begin bettering quickly. Earnings are forecast to develop 37.9% a yr going ahead, main analysts to foretell a median 12-month price goal up 23% from present ranges. That might translate to some first rate returns when including within the 7.7% dividend yield.

It’s a promising forecast, notably contemplating the vast majority of analysts are in settlement. However that doesn’t imply it’ll occur. 

What might derail the efficiency?

Pennon says it’s been actively investing in infrastructure to enhance its providers and improve its long-term progress prospects. However regardless of efforts to cut back prices and enhance operational effectivity, I’m but to see any notable enchancment in its monetary efficiency.

This was made evident earlier this yr when the corporate launched its full-year 2023 outcomes. Though income grew 14% and working revenue elevated 8.6%, it reported a £9.5m loss and dividends took a success. In earlier years, it elevated dividends by 6% on common however this yr, progress was diminished to solely 3.8%.

Luckily, the discount could be a once-off. The redirection of funds is to cowl a £2.4m positive from the Environmental Company for a sewage leak that triggered a parasitic outbreak in Brixham.

That’s reportedly been resolved however a repeat of such a difficulty might price the corporate dearly — each reputationally and financially. What’s extra, its complete debt has risen from £3.1m in 2023 to nearly £4bn this yr after buying Sutton and East Surrey (SES) water firm for £89m.

My verdict

Pennon’s enticing from a dividends perspective, with a superb fee historical past and excessive yield. Nonetheless, it appears to be making expensive operational errors and taking over a degree of debt that would quickly change into unmanageable. Its curiosity protection has dropped to 1.1 occasions and its debt-to-equity (D/E) ratio’s up to 246%.

For me, that makes it too dangerous an funding to think about for a long-term revenue portfolio.