Don't Buy Johnson Matthey Plc (LON:JMAT) For Its Next Dividend Without Doing These Checks

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

It looks like Johnson Matthey Plc (LON:JMAT) is about to go ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase Johnson Matthey's shares on or after the 2nd of December will not receive the dividend, which will be paid on the 1st of February.

The company's upcoming dividend is UK£0.22 a share, following on from the last 12 months, when the company distributed a total of UK£0.70 per share to shareholders. Looking at the last 12 months of distributions, Johnson Matthey has a trailing yield of approximately 3.4% on its current stock price of £20.66. 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.

View our latest analysis for Johnson Matthey

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Johnson Matthey paid out 91% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Johnson Matthey's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Johnson Matthey's 14% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Johnson Matthey has lifted its dividend by approximately 3.2% 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. Johnson Matthey is already paying out 91% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Has Johnson Matthey got what it takes to maintain its dividend payments? It's not a great combination to see a company with earnings in decline and paying out 91% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Johnson Matthey's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Johnson Matthey has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Johnson Matthey despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for Johnson Matthey you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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