Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Wayside Technology Group, Inc. (NASDAQ:WSTG) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 15th of November will not receive the dividend, which will be paid on the 22nd of November.
Wayside Technology Group's next dividend payment will be US$0.2 per share. Last year, in total, the company distributed US$0.7 to shareholders. Based on the last year's worth of payments, Wayside Technology Group stock has a trailing yield of around 4.9% on the current share price of $13.74. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Wayside Technology Group paying out a modest 47% of its earnings. A useful secondary check can be to evaluate whether Wayside Technology Group generated enough free cash flow to afford its dividend. Wayside Technology Group paid out more free cash flow than it generated - 147%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Wayside Technology Group does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While Wayside Technology Group's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Wayside Technology Group to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're not enthused to see that Wayside Technology Group'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. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Wayside Technology Group has lifted its dividend by approximately 1.3% a year on average.
The Bottom Line
Is Wayside Technology Group an attractive dividend stock, or better left on the shelf? Earnings per share have barely grown in this time, and although Wayside Technology Group is paying out a low percentage of its profit, its dividend was not well covered by free cash flow. It's not common to see a company paying out a limited amount of its profits yet a substantially higher percentage of its cash flow, so we'd flag this as a concern. All things considered, we are not particularly enthused about Wayside Technology Group from a dividend perspective.
Want to learn more about Wayside Technology Group's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
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