Do These 3 Checks Before Buying Spirax-Sarco Engineering plc (LON:SPX) For Its Upcoming Dividend

Readers hoping to buy Spirax-Sarco Engineering plc (LON:SPX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, 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. Accordingly, Spirax-Sarco Engineering investors that purchase the stock on or after the 25th of April will not receive the dividend, which will be paid on the 24th of May.

The company's next dividend payment will be UK£1.14 per share. Last year, in total, the company distributed UK£1.60 to shareholders. Looking at the last 12 months of distributions, Spirax-Sarco Engineering has a trailing yield of approximately 1.7% on its current stock price of UK£92.15. If you buy this business for its dividend, you should have an idea of whether Spirax-Sarco Engineering'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.

Check out our latest analysis for Spirax-Sarco Engineering

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. Spirax-Sarco Engineering paid out 64% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 59% of its free cash flow as dividends, within the usual range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. 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 not ideal to see Spirax-Sarco Engineering's earnings per share have been shrinking at 3.8% a year over the previous five years.

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, Spirax-Sarco Engineering has lifted its dividend by approximately 11% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

Should investors buy Spirax-Sarco Engineering for the upcoming dividend? While earnings per share are shrinking, it's encouraging to see that at least Spirax-Sarco Engineering's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think Spirax-Sarco Engineering is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Spirax-Sarco Engineering and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 1 warning sign for Spirax-Sarco Engineering that you should be aware of before investing in their 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.