Readers hoping to buy Serica Energy plc (LON:SQZ) 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Serica Energy investors that purchase the stock on or after the 24th of June will not receive the dividend, which will be paid on the 23rd of July.
The company's next dividend payment will be UK£0.035 per share, on the back of last year when the company paid a total of UK£0.035 to shareholders. Based on the last year's worth of payments, Serica Energy has a trailing yield of 2.8% on the current stock price of £1.23. If you buy this business for its dividend, you should have an idea of whether Serica Energy's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Serica Energy distributed an unsustainably high 120% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Fortunately, it paid out only 46% of its free cash flow in the past year.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Serica Energy fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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. For this reason, we're glad to see Serica Energy's earnings per share have risen 10% per annum over the last five years.
Unfortunately Serica Energy has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
Is Serica Energy an attractive dividend stock, or better left on the shelf? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Serica Energy's paying out such a high percentage of its profit. Overall, it's hard to get excited about Serica Energy from a dividend perspective.
In light of that, while Serica Energy has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Serica Energy has 3 warning signs we think you should be aware of.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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