Here's What We Like About Signet Jewelers' (NYSE:SIG) Upcoming Dividend

It looks like Signet Jewelers Limited (NYSE:SIG) is about to go ex-dividend in the next two days. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Signet Jewelers' shares before the 24th of January in order to receive the dividend, which the company will pay on the 21st of February.

The company's next dividend payment will be US$0.29 per share, and in the last 12 months, the company paid a total of US$1.16 per share. Looking at the last 12 months of distributions, Signet Jewelers has a trailing yield of approximately 2.0% on its current stock price of US$57.48. If you buy this business for its dividend, you should have an idea of whether Signet Jewelers's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Signet Jewelers

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Signet Jewelers paid out just 10% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Signet Jewelers generated enough free cash flow to afford its dividend. It paid out 18% of its free cash flow as dividends last year, which is conservatively low.

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.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Signet Jewelers has grown its earnings rapidly, up 39% a year for the past five years. Signet Jewelers looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Signet Jewelers has lifted its dividend by approximately 4.9% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Signet Jewelers is keeping back more of its profits to grow the business.

The Bottom Line

From a dividend perspective, should investors buy or avoid Signet Jewelers? Signet Jewelers has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Signet Jewelers for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 3 warning signs for Signet Jewelers you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.