Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Reckon Limited (ASX:RKN) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 27th of August in order to be eligible for this dividend, which will be paid on the 18th of September.
Reckon’s upcoming dividend is AU$0.03 a share, following on from the last 12 months, when the company distributed a total of AU$0.06 per share to shareholders. Looking at the last 12 months of distributions, Reckon has a trailing yield of approximately 7.8% on its current stock price of A$0.765. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. A useful secondary check can be to evaluate whether Reckon generated enough free cash flow to afford its dividend. Fortunately, it paid out only 37% of its free cash flow in the past year.
It’s positive to see that Reckon’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we’re concerned to see Reckon’s earnings per share have dropped 13% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Reckon’s dividend payments are broadly unchanged compared to where they were ten years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.
To Sum It Up
Should investors buy Reckon for the upcoming dividend? Reckon has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. To summarise, Reckon looks okay on this analysis, although it doesn’t appear a stand-out opportunity.
Curious what other investors think of Reckon? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.