Do These 3 Checks Before Buying Severn Trent Plc (LON:SVT) For Its Upcoming Dividend

It looks like Severn Trent Plc (LON:SVT) is about to go ex-dividend in the next 3 days. You can purchase shares before the 3rd of December in order to receive the dividend, which the company will pay on the 6th of January.

Severn Trent's upcoming dividend is UK£0.41 a share, following on from the last 12 months, when the company distributed a total of UK£1.00 per share to shareholders. Looking at the last 12 months of distributions, Severn Trent has a trailing yield of approximately 4.2% on its current stock price of £23.88. 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 Severn Trent can afford its dividend, and if the dividend could grow.

See our latest analysis for Severn Trent

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. Severn Trent paid out a disturbingly high 211% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Severn Trent generated enough free cash flow to afford its dividend. Severn Trent paid out more free cash flow than it generated - 158%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Severn Trent's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. 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 not enthused to see that Severn Trent's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Severn Trent has increased its dividend at approximately 3.3% a year on average.

Final Takeaway

Is Severn Trent worth buying for its dividend? Not only are earnings per share flat, but Severn Trent is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Severn Trent and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 3 warning signs for Severn Trent (of which 1 shouldn't be ignored!) you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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.
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