Don't Race Out To Buy SGS SA (VTX:SGSN) Just Because It's Going Ex-Dividend

SGS SA (VTX:SGSN) stock is about to trade ex-dividend in 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, SGS investors that purchase the stock on or after the 31st of March will not receive the dividend, which will be paid on the 4th of April.

The company's next dividend payment will be CHF80.00 per share. Last year, in total, the company distributed CHF80.00 to shareholders. Last year's total dividend payments show that SGS has a trailing yield of 3.0% on the current share price of CHF2654. If you buy this business for its dividend, you should have an idea of whether SGS's dividend is reliable and sustainable. As a result, readers should always check whether SGS has been able to grow its dividends, or if the dividend might be cut.

View 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 98% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. Dividends consumed 72% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's good to see that while SGS's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see SGS earnings per share are up 2.7% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, SGS has lifted its dividend by approximately 2.1% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Has SGS got what it takes to maintain its dividend payments? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering SGS as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 2 warning signs for SGS that you should be aware of before investing in their shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.