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 4 days. This means that investors who purchase shares on or after the 30th of August will not receive the dividend, which will be paid on the 16th of September.
Smartgroup’s upcoming dividend is AU$0.21 a share, following on from the last 12 months, when the company distributed a total of AU$0.43 per share to shareholders. Last year’s total dividend payments show that Smartgroup has a trailing yield of 4.0% on the current share price of A$10.86. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 90% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We’d be concerned if earnings began to decline. 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 (69%) of its free cash flow in the past year, which is within an average range for most companies.
It’s positive to see that Smartgroup’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?
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 earnings fall far enough, the company could be forced to cut its dividend. It’s encouraging to see Smartgroup has grown its earnings rapidly, up 66% a year for the past five years. Earnings per share are growing at a rapid rate, yet the company is paying out more than three-quarters of its earnings.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Smartgroup has delivered an average of 48% per year annual increase in its dividend, based on the past 5 years of dividend payments. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Is Smartgroup an attractive dividend stock, or better left on the shelf? It’s good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That’s why we’re glad to see Smartgroup’s earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow – 90% and 69% respectively. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we’re not all that optimistic on its dividend prospects.
Wondering what the future holds for Smartgroup? 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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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.