Don't Race Out To Buy Reckitt Benckiser Group plc (LON:RKT) Just Because It's Going Ex-Dividend

Reckitt Benckiser Group plc (LON:RKT) stock is about to trade ex-dividend in four 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. Accordingly, Reckitt Benckiser Group investors that purchase the stock on or after the 3rd of August will not receive the dividend, which will be paid on the 15th of September.

The company's next dividend payment will be UK£0.77 per share, and in the last 12 months, the company paid a total of UK£1.83 per share. Calculating the last year's worth of payments shows that Reckitt Benckiser Group has a trailing yield of 3.1% on the current share price of £59.02. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Reckitt Benckiser Group

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. Reckitt Benckiser Group is paying out an acceptable 60% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Reckitt Benckiser Group generated enough free cash flow to afford its dividend. It paid out more than half (64%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Reckitt Benckiser 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?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Reckitt Benckiser Group's earnings per share have dropped 8.4% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

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, Reckitt Benckiser Group has lifted its dividend by approximately 3.8% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

To Sum It Up

Is Reckitt Benckiser Group an attractive dividend stock, or better left on the shelf? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Reckitt Benckiser Group as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 2 warning signs for Reckitt Benckiser Group that we recommend you consider before investing in the business.

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.