Should Income Investors Look At QinetiQ Group plc (LON:QQ.) Before Its Ex-Dividend?

QinetiQ Group plc (LON:QQ.) stock is about to trade ex-dividend in 4 days. Investors can purchase shares before the 7th of January in order to be eligible for this dividend, which will be paid on the 5th of February.

QinetiQ Group's next dividend payment will be UK£0.022 per share, and in the last 12 months, the company paid a total of UK£0.066 per share. Last year's total dividend payments show that QinetiQ Group has a trailing yield of 2.1% on the current share price of £3.198. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for QinetiQ Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. QinetiQ Group paid out a comfortable 32% of its profit last year. 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. Luckily it paid out just 22% of its free cash flow last year.

It's positive to see that QinetiQ Group'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.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see QinetiQ Group earnings per share are up 2.3% per annum over the last five years. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. QinetiQ Group has delivered an average of 15% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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.

The Bottom Line

From a dividend perspective, should investors buy or avoid QinetiQ Group? Earnings per share growth has been growing somewhat, and QinetiQ Group 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 QinetiQ Group is halfway there. Overall we think this is an attractive combination and worthy of further research.

On that note, you'll want to research what risks QinetiQ Group is facing. Every company has risks, and we've spotted 2 warning signs for QinetiQ Group you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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