Diageo plc (LON:DGE) Goes Ex-Dividend Soon

By
Simply Wall St
Published
August 21, 2021
LSE:DGE
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 Diageo plc (LON:DGE) is about to go ex-dividend in just three days. 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. Thus, you can purchase Diageo's shares before the 26th of August in order to receive the dividend, which the company will pay on the 7th of October.

The company's upcoming dividend is UK£0.45 a share, following on from the last 12 months, when the company distributed a total of UK£0.73 per share to shareholders. Looking at the last 12 months of distributions, Diageo has a trailing yield of approximately 2.1% on its current stock price of £35.23. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Diageo

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. Diageo paid out 64% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Diageo generated enough free cash flow to afford its dividend. It paid out more than half (54%) of its free cash flow in the past year, which is within an average 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.

historic-dividend
LSE:DGE Historic Dividend August 22nd 2021

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. With that in mind, we're encouraged by the steady growth at Diageo, with earnings per share up 4.9% on average over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

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, Diageo has lifted its dividend by approximately 6.7% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Has Diageo got what it takes to maintain its dividend payments? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. In summary, while it has some positive characteristics, we're not inclined to race out and buy Diageo today.

With that being said, if dividends aren't your biggest concern with Diageo, you should know about the other risks facing this business. For example - Diageo has 1 warning sign we think you should be aware of.

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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