Is It Worth Considering Steel & Tube Holdings Limited (NZSE:STU) For Its Upcoming Dividend?

Steel & Tube Holdings Limited (NZSE:STU) stock is about to trade ex-dividend in four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Steel & Tube Holdings' shares on or after the 13th of March will not receive the dividend, which will be paid on the 28th of March.

The company's upcoming dividend is NZ$0.0470588 a share, following on from the last 12 months, when the company distributed a total of NZ$0.08 per share to shareholders. Last year's total dividend payments show that Steel & Tube Holdings has a trailing yield of 7.0% on the current share price of NZ$1.14. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Steel & Tube Holdings

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Steel & Tube Holdings distributed an unsustainably high 126% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 15% of its free cash flow last year.

It's good to see that while Steel & Tube Holdings's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Steel & Tube Holdings's earnings have been skyrocketing, up 52% per annum for the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Steel & Tube Holdings's dividend payments per share have declined at 7.3% per year on average over the past 10 years, which is uninspiring. Steel & Tube Holdings is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is Steel & Tube Holdings worth buying for its dividend? Earnings per share have been rising nicely although, even though its cashflow payout ratio is low, we question why Steel & Tube Holdings is paying out so much of its profit. In summary, it's hard to get excited about Steel & Tube Holdings from a dividend perspective.

While it's tempting to invest in Steel & Tube Holdings for the dividends alone, you should always be mindful of the risks involved. For example, we've found 2 warning signs for Steel & Tube Holdings that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.