Electrocomponents plc (LON:ECM) Passed Our Checks, And It's About To Pay A UK£0.064 Dividend

By
Simply Wall St
Published
November 20, 2021
LSE:RS1
Source: Shutterstock

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 Electrocomponents plc (LON:ECM) is about to go ex-dividend in just three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. 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. In other words, investors can purchase Electrocomponents' shares before the 25th of November in order to be eligible for the dividend, which will be paid on the 7th of January.

The company's next dividend payment will be UK£0.064 per share, on the back of last year when the company paid a total of UK£0.16 to shareholders. Based on the last year's worth of payments, Electrocomponents has a trailing yield of 1.3% on the current stock price of £12.52. If you buy this business for its dividend, you should have an idea of whether Electrocomponents's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Electrocomponents

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Electrocomponents paid out a comfortable 41% of its profit last year. A useful secondary check can be to evaluate whether Electrocomponents generated enough free cash flow to afford its dividend. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Electrocomponents'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.

historic-dividend
LSE:ECM Historic Dividend November 21st 2021

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. That's why it's comforting to see Electrocomponents's earnings have been skyrocketing, up 51% per annum for the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Electrocomponents has lifted its dividend by approximately 3.5% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

To Sum It Up

Should investors buy Electrocomponents for the upcoming dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Electrocomponents paid out less than half its earnings and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

In light of that, while Electrocomponents has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for Electrocomponents and you should be aware of this before buying any shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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