Stock Analysis

Should You Buy Solid State plc (LON:SOLI) For Its Upcoming Dividend?

  •  Updated
AIM:SOLI
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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Solid State plc (LON:SOLI) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 28th of January will not receive this dividend, which will be paid on the 19th of February.

Solid State's next dividend payment will be UK£0.052 per share, on the back of last year when the company paid a total of UK£0.13 to shareholders. Last year's total dividend payments show that Solid State has a trailing yield of 1.8% on the current share price of £6.8. If you buy this business for its dividend, you should have an idea of whether Solid State's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Solid State

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see Solid State paying out a modest 32% of its 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. It paid out 20% of its free cash flow as dividends last year, which is conservatively low.

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
AIM:SOLI Historic Dividend January 23rd 2021

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Solid State, with earnings per share up 2.5% on average over the last five years. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Solid State has delivered 15% dividend growth per year on average over the past 10 years. 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 Solid State got what it takes to maintain its dividend payments? Earnings per share have been growing moderately, and Solid State is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Solid State is being conservative with its dividend payouts and could still perform reasonably over the long run. Solid State looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

So while Solid State looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 1 warning sign for Solid State and you should be aware of this before buying any 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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