Readers hoping to buy Brooks Automation, Inc. (NASDAQ:BRKS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 5th of March to receive the dividend, which will be paid on the 27th of March.
Brooks Automation’s next dividend payment will be US$0.10 per share, on the back of last year when the company paid a total of US$0.40 to shareholders. Based on the last year’s worth of payments, Brooks Automation stock has a trailing yield of around 1.2% on the current share price of $34.52. 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 Brooks Automation can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Brooks Automation distributed an unsustainably high 176% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.
It’s good to see that while Brooks Automation’s dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. It’s encouraging to see Brooks Automation has grown its earnings rapidly, up 62% a year for the past five years.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, nine years ago, Brooks Automation has lifted its dividend by approximately 2.5% a year on average. It’s good to see both earnings and the dividend have improved – although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Has Brooks Automation got what it takes to maintain its dividend payments? It’s good to see earnings per share growing and low cashflow payout ratio, although we’re uncomfortable with Brooks Automation’s paying out such a high percentage of its profit. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Brooks Automation’s dividend merits.
Wondering what the future holds for Brooks Automation? See what the five analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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