Should You Buy Scales Corporation Limited (NZSE:SCL) For Its 3.9% Dividend?

Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. In the last few years Scales Corporation Limited (NZSE:SCL) has paid a dividend to shareholders. Today it yields 3.9%. Let’s dig deeper into whether Scales should have a place in your portfolio.

See our latest analysis for Scales

5 checks you should do on a dividend stock

If you are a dividend investor, you should always assess these five key metrics:

  • Is its annual yield among the top 25% of dividend-paying companies?
  • Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
  • Has the amount of dividend per share grown over the past?
  • Is is able to pay the current rate of dividends from its earnings?
  • Will the company be able to keep paying dividend based on the future earnings growth?
NZSE:SCL Historical Dividend Yield, March 20th 2019
NZSE:SCL Historical Dividend Yield, March 20th 2019

Does Scales pass our checks?

The current trailing twelve-month payout ratio for SCL is 90%, which means that the dividend is not well-covered by its earnings. However, going forward, analysts expect SCL’s payout to fall into a more sustainable range of 77% of its earnings. Assuming a constant share price, this equates to a dividend yield of 4.0%. Furthermore, EPS should increase to NZ$0.21, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Unfortunately, it is really too early to view Scales as a dividend investment. It has only been consistently paying dividends for 4 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Scales produces a yield of 3.9%, which is high for Food stocks but still below the market’s top dividend payers.

Next Steps:

After digging a little deeper into Scales’s yield, it’s easy to see why you should be cautious investing in the company just for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. Below, I’ve compiled three key aspects you should further research:

  1. Future Outlook: What are well-informed industry analysts predicting for SCL’s future growth? Take a look at our free research report of analyst consensus for SCL’s outlook.
  2. Valuation: What is SCL worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether SCL is currently mispriced by the market.
  3. Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.