Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Imdex Limited (ASX:IMD) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 9th of March to receive the dividend, which will be paid on the 24th of March.
Imdex’s next dividend payment will be AU$0.01 per share. Last year, in total, the company distributed AU$0.028 to shareholders. Based on the last year’s worth of payments, Imdex stock has a trailing yield of around 1.9% on the current share price of A$1.475. If you buy this business for its dividend, you should have an idea of whether Imdex’s dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are 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. That’s why it’s good to see Imdex paying out a modest 28% of its earnings. A useful secondary check can be to evaluate whether Imdex generated enough free cash flow to afford its dividend. Fortunately, it paid out only 40% of its free cash flow in the past year.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That’s why it’s comforting to see Imdex’s earnings have been skyrocketing, up 48% per annum for the past five years. Imdex is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Imdex’s dividend payments per share have declined at 2.4% per year on average over the past nine years, which is uninspiring. It’s unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We’d hope it’s because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.
Has Imdex got what it takes to maintain its dividend payments? It’s great that Imdex is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It’s disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Imdex looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
On that note, you’ll want to research what risks Imdex is facing. In terms of investment risks, we’ve identified 1 warning sign with Imdex 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.
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.
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