Is It Worth Considering BAE Systems plc (LON:BA.) For Its Upcoming Dividend?

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BAE Systems plc (LON:BA.) is about to trade ex-dividend in the next four 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 of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Thus, you can purchase BAE Systems' shares before the 23rd of October in order to receive the dividend, which the company will pay on the 3rd of December.

The company's next dividend payment will be UK£0.135 per share. Last year, in total, the company distributed UK£0.34 to shareholders. Based on the last year's worth of payments, BAE Systems stock has a trailing yield of around 1.9% on the current share price of UK£18.315. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. BAE Systems is paying out an acceptable 52% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether BAE Systems generated enough free cash flow to afford its dividend. Fortunately, it paid out only 48% of its free cash flow in the past year.

It's positive to see that BAE Systems'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.

Check out our latest analysis for BAE Systems

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 BAE Systems, with earnings per share up 7.4% on average over the last five years. Decent historical earnings per share growth suggests BAE Systems 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, BAE Systems has lifted its dividend by approximately 5.2% 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.

To Sum It Up

From a dividend perspective, should investors buy or avoid BAE Systems? While earnings per share growth has been modest, BAE Systems'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. In summary, it's hard to get excited about BAE Systems from a dividend perspective.

On that note, you'll want to research what risks BAE Systems is facing. For example - BAE Systems has 1 warning sign we think you should be aware of.

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.

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.