Why It Might Not Make Sense To Buy Somero Enterprises, Inc. (LON:SOM) For Its Upcoming 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 Somero Enterprises, Inc. (LON:SOM) is about to go ex-dividend in just three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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. Thus, you can purchase Somero Enterprises' shares before the 10th of April in order to receive the dividend, which the company will pay on the 9th of May.

The company's next dividend payment will be US$0.1298 per share. Last year, in total, the company distributed US$0.21 to shareholders. Last year's total dividend payments show that Somero Enterprises has a trailing yield of 6.6% on the current share price of UK£2.46. If you buy this business for its dividend, you should have an idea of whether Somero Enterprises's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Somero Enterprises paid out more than half (50%) of its earnings last year, which is a regular payout ratio for most companies. 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. The company paid out 104% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Somero Enterprises does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Somero Enterprises's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Somero Enterprises's ability to maintain its dividend.

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 that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we're not overly excited about Somero Enterprises's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Somero Enterprises has increased its dividend at approximately 23% a year on average.

The Bottom Line

Is Somero Enterprises worth buying for its dividend? Earnings per share have not grown and Somero Enterprises's profit payout ratio looks reasonable. However, it paid out a disconcertingly high percentage of its cashflow, which is a worry. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

So if you're still interested in Somero Enterprises despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 1 warning sign for Somero Enterprises and you should be aware of this before buying any 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.