easyJet plc (LON:EZJ) Goes Ex-Dividend Soon

Readers hoping to buy easyJet plc (LON:EZJ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase easyJet's shares before the 20th of February to receive the dividend, which will be paid on the 21st of March.

The company's upcoming dividend is UK£0.121 a share, following on from the last 12 months, when the company distributed a total of UK£0.12 per share to shareholders. Last year's total dividend payments show that easyJet has a trailing yield of 2.3% on the current share price of UK£5.186. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether easyJet can afford its dividend, and if the dividend could grow.

See our latest analysis for easyJet

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. easyJet has a low and conservative payout ratio of just 20% of its income after tax. A useful secondary check can be to evaluate whether easyJet generated enough free cash flow to afford its dividend. The good news is it paid out just 6.0% of its free cash flow in the last year.

It's positive to see that easyJet'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?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by easyJet's 7.5% 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. easyJet's dividend payments per share have declined at 12% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Has easyJet got what it takes to maintain its dividend payments? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. In summary, while it has some positive characteristics, we're not inclined to race out and buy easyJet today.

While it's tempting to invest in easyJet for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for easyJet you should be aware of.

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.