Scotts Miracle-Gro (NYSE:SMG) Could Be A Buy For Its Upcoming Dividend

By
Simply Wall St
Published
November 20, 2021
NYSE:SMG
Source: Shutterstock

The Scotts Miracle-Gro Company (NYSE:SMG) stock is about to trade ex-dividend in 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. Thus, you can purchase Scotts Miracle-Gro's shares before the 26th of November in order to receive the dividend, which the company will pay on the 10th of December.

The company's next dividend payment will be US$0.66 per share, and in the last 12 months, the company paid a total of US$2.64 per share. Last year's total dividend payments show that Scotts Miracle-Gro has a trailing yield of 1.6% on the current share price of $165.88. If you buy this business for its dividend, you should have an idea of whether Scotts Miracle-Gro's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Scotts Miracle-Gro

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. Fortunately Scotts Miracle-Gro's payout ratio is modest, at just 27% of profit. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out more than three-quarters (87%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

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.

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

historic-dividend
NYSE:SMG Historic Dividend November 21st 2021

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Scotts Miracle-Gro's earnings per share have risen 18% per annum over the last five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. We're surprised that management has not elected to reinvest more in the business to accelerate growth further.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Scotts Miracle-Gro has delivered an average of 10% per year annual increase in its dividend, based on the past 10 years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Has Scotts Miracle-Gro got what it takes to maintain its dividend payments? Earnings per share have grown at a nice rate in recent times and over the last year, Scotts Miracle-Gro paid out less than half its earnings and a bit over half its free cash flow. Scotts Miracle-Gro looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while Scotts Miracle-Gro has an appealing dividend, it's worth knowing the risks involved with this stock. Case in point: We've spotted 1 warning sign for Scotts Miracle-Gro you should be aware of.

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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