Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see UHY ECA S.A. (WSE:ECA) is about to trade ex-dividend in the next four days. 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 UHY ECA's shares before the 6th of July to receive the dividend, which will be paid on the 14th of July.
The company's next dividend payment will be zł0.06 per share, on the back of last year when the company paid a total of zł0.06 to shareholders. Last year's total dividend payments show that UHY ECA has a trailing yield of 3.2% on the current share price of PLN1.89. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. UHY ECA paid out 55% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether UHY ECA 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 12% 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.
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. This is why it's a relief to see UHY ECA earnings per share are up 5.5% per annum over the last five years. Decent historical earnings per share growth suggests UHY ECA has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. UHY ECA's dividend payments per share have declined at 13% per year on average over the past 10 years, which is uninspiring. UHY ECA 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.
The Bottom Line
From a dividend perspective, should investors buy or avoid UHY ECA? Earnings per share growth has been modest and UHY ECA paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. In summary, while it has some positive characteristics, we're not inclined to race out and buy UHY ECA today.
While it's tempting to invest in UHY ECA for the dividends alone, you should always be mindful of the risks involved. We've identified 5 warning signs with UHY ECA (at least 2 which are significant), and understanding these should be part of your investment process.
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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