Readers hoping to buy Helical plc (LON:HLCL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Helical investors that purchase the stock on or after the 24th of June will not receive the dividend, which will be paid on the 26th of July.
The company's upcoming dividend is UK£0.074 a share, following on from the last 12 months, when the company distributed a total of UK£0.10 per share to shareholders. Calculating the last year's worth of payments shows that Helical has a trailing yield of 2.3% on the current share price of £4.375. If you buy this business for its dividend, you should have an idea of whether Helical's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Helical paid out 68% of its earnings to investors last year, a normal payout level for most businesses. 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. Over the last year, it paid out dividends equivalent to 274% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.
While Helical's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Helical's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Helical's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 31% a year over the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Helical has delivered an average of 7.5% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.
Is Helical worth buying for its dividend? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. Bottom line: Helical has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
With that in mind though, if the poor dividend characteristics of Helical don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 4 warning signs we've spotted with Helical (including 1 which doesn't sit too well with us).
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.
If you decide to trade Helical, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.