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 Samuel Heath & Sons plc (LON:HSM) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Thus, you can purchase Samuel Heath & Sons' shares before the 24th of February in order to receive the dividend, which the company will pay on the 25th of March.
The company's upcoming dividend is UK£0.055 a share, following on from the last 12 months, when the company distributed a total of UK£0.11 per share to shareholders. Based on the last year's worth of payments, Samuel Heath & Sons stock has a trailing yield of around 1.8% on the current share price of £6. If you buy this business for its dividend, you should have an idea of whether Samuel Heath & Sons's dividend is reliable and sustainable. So we need to investigate whether Samuel Heath & Sons can afford its dividend, and if the dividend could grow.
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. Samuel Heath & Sons paid out a comfortable 26% of its profit last year. A useful secondary check can be to evaluate whether Samuel Heath & Sons generated enough free cash flow to afford its dividend. Luckily it paid out just 24% of its free cash flow last year.
It's positive to see that Samuel Heath & Sons'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.
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 Samuel Heath & Sons earnings per share are up 9.8% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Samuel Heath & Sons's dividend payments per share have declined at 0.7% per year on average over the past 10 years, which is uninspiring.
To Sum It Up
Is Samuel Heath & Sons an attractive dividend stock, or better left on the shelf? Earnings per share growth has been growing somewhat, and Samuel Heath & Sons is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Samuel Heath & Sons is halfway there. Overall we think this is an attractive combination and worthy of further research.
While it's tempting to invest in Samuel Heath & Sons for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 4 warning signs for Samuel Heath & Sons (2 shouldn't be ignored!) that you ought to be aware of before buying the shares.
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.
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.