Should You Buy DigiTouch S.p.A. (BIT:DGT) For Its Upcoming Dividend?

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see DigiTouch S.p.A. (BIT:DGT) is about to trade ex-dividend in the next 3 days. Typically, the ex-dividend date is two business days 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 important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase DigiTouch's shares on or after the 23rd of June, you won't be eligible to receive the dividend, when it is paid on the 25th of June.

The company's upcoming dividend is €0.03 a share, following on from the last 12 months, when the company distributed a total of €0.03 per share to shareholders. Based on the last year's worth of payments, DigiTouch stock has a trailing yield of around 1.5% on the current share price of €1.97. If you buy this business for its dividend, you should have an idea of whether DigiTouch's dividend is reliable and sustainable. As a result, readers should always check whether DigiTouch has been able to grow its dividends, or if the dividend might be cut.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately DigiTouch's payout ratio is modest, at just 25% of profit. A useful secondary check can be to evaluate whether DigiTouch generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 9.4% of its cash flow last year.

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.

See our latest analysis for DigiTouch

Click here to see how much of its profit DigiTouch paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see DigiTouch has grown its earnings rapidly, up 49% a year for the past five years. DigiTouch is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. DigiTouch has seen its dividend decline 4.0% per annum on average over the past seven years, which is not great to see. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

Final Takeaway

Has DigiTouch got what it takes to maintain its dividend payments? It's great that DigiTouch is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There's a lot to like about DigiTouch, and we would prioritise taking a closer look at it.

On that note, you'll want to research what risks DigiTouch is facing. In terms of investment risks, we've identified 1 warning sign with DigiTouch and understanding them should be part of your investment process.

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.