It looks like SThree plc (LON:STEM) is about to go ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, SThree investors that purchase the stock on or after the 5th of May will not receive the dividend, which will be paid on the 10th of June.
The company's next dividend payment will be UK£0.08 per share, on the back of last year when the company paid a total of UK£0.11 to shareholders. Calculating the last year's worth of payments shows that SThree has a trailing yield of 3.0% on the current share price of £3.675. If you buy this business for its dividend, you should have an idea of whether SThree's dividend is reliable and sustainable. As a result, readers should always check whether SThree has been able to grow its dividends, or if the dividend might be cut.
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. That's why it's good to see SThree paying out a modest 34% of its earnings. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 19% of its cash flow last year.
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.
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 SThree earnings per share are up 8.4% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. SThree's dividend payments per share have declined at 2.4% per year on average over the past 10 years, which is uninspiring. SThree is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Should investors buy SThree for the upcoming dividend? Earnings per share have been growing moderately, and SThree is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but SThree is being conservative with its dividend payouts and could still perform reasonably over the long run. SThree looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
On that note, you'll want to research what risks SThree is facing. To help with this, we've discovered 2 warning signs for SThree that you should be aware of before investing in their shares.
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.
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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.