QinetiQ Group plc (LON:QQ.) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 1st of August, you won’t be eligible to receive this dividend, when it is paid on the 30th of August.
QinetiQ Group’s next dividend payment will be UK£0.045 per share, and in the last 12 months, the company paid a total of UK£0.066 per share. Based on the last year’s worth of payments, QinetiQ Group has a trailing yield of 2.3% on the current stock price of £2.894. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether QinetiQ Group can afford its dividend, and if the dividend could grow.
Check out our latest analysis for QinetiQ Group
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. Fortunately QinetiQ Group’s payout ratio is modest, at just 33% of profit. A useful secondary check can be to evaluate whether QinetiQ Group generated enough free cash flow to afford its dividend. Over the past year it paid out 128% of its free cash flow as dividends, which is uncomfortably high. We’re curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
QinetiQ Group does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
QinetiQ Group paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough cash to cover the dividend. Cash is king, as they say, and were QinetiQ Group to repeatedly pay dividends that aren’t well covered by cashflow, we would consider this a warning sign.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we’re glad to see QinetiQ Group’s earnings per share have risen 14% per annum over the last five years. Earnings have been growing at a decent rate, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, QinetiQ Group has increased its dividend at approximately 4.1% 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.
To Sum It Up
Has QinetiQ Group got what it takes to maintain its dividend payments? We’re glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it’s not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall we’re not hugely bearish on the stock, but there are likely better dividend investments out there.
Wondering what the future holds for QinetiQ Group? See what the seven analysts we track 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.
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