Dividend Investors: Don't Be Too Quick To Buy Hill & Smith Holdings PLC (LON:HILS) For Its Upcoming Dividend

By
Simply Wall St
Published
November 26, 2021
LSE:HILS
Source: Shutterstock

Hill & Smith Holdings PLC (LON:HILS) is about to trade 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. 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. In other words, investors can purchase Hill & Smith Holdings' shares before the 2nd of December in order to be eligible for the dividend, which will be paid on the 7th of January.

The company's next dividend payment will be UK£0.12 per share. Last year, in total, the company distributed UK£0.35 to shareholders. Looking at the last 12 months of distributions, Hill & Smith Holdings has a trailing yield of approximately 1.8% on its current stock price of £16.76. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Hill & Smith Holdings has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Hill & Smith Holdings

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. Hill & Smith Holdings distributed an unsustainably high 116% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 13% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Hill & Smith Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

historic-dividend
LSE:HILS Historic Dividend November 27th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's not ideal to see Hill & Smith Holdings's earnings per share have been shrinking at 3.9% 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, Hill & Smith Holdings has lifted its dividend by approximately 8.8% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Hill & Smith Holdings is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Should investors buy Hill & Smith Holdings for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 116% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Hill & Smith Holdings 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 2 warning signs for Hill & Smith Holdings that you should be aware of before investing in their shares.

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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