Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Smartgroup Corporation Ltd (ASX:SIQ) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 1st of September will not receive the dividend, which will be paid on the 16th of September.
Smartgroup’s upcoming dividend is AU$0.17 a share, following on from the last 12 months, when the company distributed a total of AU$0.43 per share to shareholders. Looking at the last 12 months of distributions, Smartgroup has a trailing yield of approximately 7.1% on its current stock price of A$6.05. If you buy this business for its dividend, you should have an idea of whether Smartgroup’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Last year Smartgroup paid out 103% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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 paid out more than half (70%) of its free cash flow in the past year, which is within an average range for most companies.
It’s good to see that while Smartgroup’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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Smartgroup’s earnings per share have been growing at 19% a year for the past five years.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Smartgroup has delivered an average of 38% per year annual increase in its dividend, based on the past six years of dividend payments. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
To Sum It Up
Is Smartgroup worth buying for its dividend? Growing earnings per share and a normal cashflow payout ratio is an ok combination, but we’re concerned that the company is paying out such a high percentage of its income as dividends. Overall, it’s not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
So if you want to do more digging on Smartgroup, you’ll find it worthwhile knowing the risks that this stock faces. In terms of investment risks, we’ve identified 1 warning sign with Smartgroup and understanding them should be part of your investment process.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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