Should Income Investors Look At Watt's S.A. (SNSE:WATTS) Before Its Ex-Dividend?

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Watt's S.A. (SNSE:WATTS) is about to go ex-dividend in just 4 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Watt's' shares on or after the 12th of May, you won't be eligible to receive the dividend, when it is paid on the 15th of May.

The company's next dividend payment will be CL$40.00 per share, on the back of last year when the company paid a total of CL$40.00 to shareholders. Based on the last year's worth of payments, Watt's has a trailing yield of 5.4% on the current stock price of CL$745.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

We've discovered 2 warning signs about Watt's. View them for free.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Watt's paid out 53% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (67%) of its free cash flow in the past year, which is within an average range for most companies.

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.

See our latest analysis for Watt's

Click here to see how much of its profit Watt's paid out over the last 12 months.

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. This is why it's a relief to see Watt's earnings per share are up 8.9% per annum over the last five years. Decent historical earnings per share growth suggests Watt's has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Watt's has delivered 11% dividend growth per year on average over the past seven years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Watt's worth buying for its dividend? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. Overall, it's hard to get excited about Watt's from a dividend perspective.

If you're not too concerned about Watt's's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Case in point: We've spotted 2 warning signs for Watt's you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.