Don't Race Out To Buy Somero Enterprises, Inc. (LON:SOM) Just Because It's Going Ex-Dividend

Somero Enterprises, Inc. (LON:SOM) is about to trade ex-dividend in the next three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled 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. This means that investors who purchase Somero Enterprises' shares on or after the 18th of September will not receive the dividend, which will be paid on the 17th of October.

The company's next dividend payment will be US$0.04 per share, on the back of last year when the company paid a total of US$0.21 to shareholders. Calculating the last year's worth of payments shows that Somero Enterprises has a trailing yield of 7.0% on the current share price of UK£2.225. If you buy this business for its dividend, you should have an idea of whether Somero Enterprises's dividend is reliable and sustainable. As a result, readers should always check whether Somero Enterprises has been able to grow its dividends, or if the dividend might be cut.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list 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. Somero Enterprises paid out more than half (54%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Somero Enterprises generated enough free cash flow to afford its dividend. It paid out more than half (66%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Somero Enterprises'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.

See our latest analysis for Somero Enterprises

Click here to see how much of its profit Somero Enterprises paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Somero Enterprises's 8.6% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Somero Enterprises has lifted its dividend by approximately 10% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Is Somero Enterprises worth buying for its dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Somero Enterprises and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Somero Enterprises (1 makes us a bit uncomfortable!) that deserve your attention before investing in 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.

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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.