Do These 3 Checks Before Buying Sensient Technologies Corporation (NYSE:SXT) For Its Upcoming Dividend

Sensient Technologies Corporation (NYSE:SXT) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 1st of February, you won't be eligible to receive this dividend, when it is paid on the 1st of March.

Sensient Technologies's next dividend payment will be US$0.39 per share. Last year, in total, the company distributed US$1.56 to shareholders. Looking at the last 12 months of distributions, Sensient Technologies has a trailing yield of approximately 2.2% on its current stock price of $72.36. 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! So we need to investigate whether Sensient Technologies can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Sensient Technologies

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. Sensient Technologies paid out 98% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It distributed 45% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while Sensient Technologies's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Sensient Technologies's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Sensient Technologies has increased its dividend at approximately 6.9% a year on average.

To Sum It Up

Is Sensient Technologies worth buying for its dividend? Along with flat earnings per share, Sensient Technologies paid out an uncomfortably high percentage of its earnings. It paid out a lower percentage of its free cash flow. It's not that we think Sensient Technologies is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Sensient Technologies. To help with this, we've discovered 4 warning signs for Sensient Technologies that you should be aware of before investing in their shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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