It looks like Advanced Drainage Systems, Inc. (NYSE:WMS) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 29th of August, you won’t be eligible to receive this dividend, when it is paid on the 13th of September.
Advanced Drainage Systems’s next dividend payment will be US$0.09 per share, and in the last 12 months, the company paid a total of US$0.36 per share. Looking at the last 12 months of distributions, Advanced Drainage Systems has a trailing yield of approximately 1.2% on its current stock price of $31.22. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! So we need to investigate whether Advanced Drainage Systems can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Advanced Drainage Systems paid a dividend last year despite being unprofitable. This might be a one-off event, but it’s not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Advanced Drainage Systems didn’t generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out more than half (57%) of its free cash flow in the past year, which is within an average range for most companies.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. Advanced Drainage Systems reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last 5 years, Advanced Drainage Systems has lifted its dividend by approximately 18% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Has Advanced Drainage Systems got what it takes to maintain its dividend payments? First, it’s not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Advanced Drainage Systems’s dividend merits.
Keen to explore more data on Advanced Drainage Systems’s financial performance? Check out our visualisation of its historical revenue and earnings growth.
If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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