Stock Analysis

We Wouldn't Be Too Quick To Buy ADT Inc. (NYSE:ADT) Before It Goes Ex-Dividend

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NYSE:ADT
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Readers hoping to buy ADT Inc. (NYSE:ADT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day 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 two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, ADT investors that purchase the stock on or after the 14th of December will not receive the dividend, which will be paid on the 4th of January.

The company's upcoming dividend is US$0.035 a share, following on from the last 12 months, when the company distributed a total of US$0.14 per share to shareholders. Based on the last year's worth of payments, ADT stock has a trailing yield of around 1.4% on the current share price of $9.82. If you buy this business for its dividend, you should have an idea of whether ADT's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Our analysis indicates that ADT is potentially undervalued!

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. ADT paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If ADT didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Dividends consumed 55% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

historic-dividend
NYSE:ADT Historic Dividend December 9th 2022

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. ADT reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. ADT's dividend payments are broadly unchanged compared to where they were five years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

We update our analysis on ADT every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Has ADT got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." 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 ADT and want to know more, you'll find it very useful to know what risks this stock faces. Case in point: We've spotted 1 warning sign for ADT you should be aware of.

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

Valuation is complex, but we're helping make it simple.

Find out whether ADT is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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