Income Investors Should Know That Sodexo S.A. (EPA:SW) Goes Ex-Dividend Soon

Sodexo S.A. (EPA:SW) stock is about to trade ex-dividend in 3 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Sodexo's shares before the 27th of August to receive the dividend, which will be paid on the 29th of August.

The company's next dividend payment will be €6.24 per share, on the back of last year when the company paid a total of €3.10 to shareholders. Based on the last year's worth of payments, Sodexo stock has a trailing yield of around 3.5% on the current share price of €87.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Sodexo

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Sodexo paid out 63% of its earnings to investors last year, a normal payout level for most businesses. 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 distributed 44% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Sodexo'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.

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

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Sodexo, with earnings per share up 2.2% on average over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Sodexo has increased its dividend at approximately 6.7% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Should investors buy Sodexo for the upcoming dividend? While earnings per share growth has been modest, Sodexo's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. All things considered, we are not particularly enthused about Sodexo from a dividend perspective.

While it's tempting to invest in Sodexo for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 2 warning signs with Sodexo and understanding them should be part of your investment process.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.