Don't Buy SGS SA (VTX:SGSN) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
March 20, 2021
SWX:SGSN
Source: Shutterstock

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see SGS SA (VTX:SGSN) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 25th of March, you won't be eligible to receive this dividend, when it is paid on the 29th of March.

SGS's upcoming dividend is CHF80.00 a share, following on from the last 12 months, when the company distributed a total of CHF80.00 per share to shareholders. Calculating the last year's worth of payments shows that SGS has a trailing yield of 3.0% on the current share price of CHF2690. If you buy this business for its dividend, you should have an idea of whether SGS's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for SGS

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SGS paid out 125% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether SGS generated enough free cash flow to afford its dividend. Over the last year it paid out 65% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while SGS's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
SWX:SGSN Historic Dividend March 21st 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that SGS's earnings are down 2.3% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, SGS has lifted its dividend by approximately 2.1% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. SGS is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Is SGS an attractive dividend stock, or better left on the shelf? Earnings per share have been in decline, which is not encouraging. Additionally, SGS is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in SGS despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 2 warning signs for SGS that you should be aware of before investing in their shares.

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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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.