It looks like SkyWest, Inc. (NASDAQ:SKYW) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 30th of March in order to be eligible for this dividend, which will be paid on the 6th of April.
SkyWest’s next dividend payment will be US$0.14 per share. Last year, in total, the company distributed US$0.56 to shareholders. Last year’s total dividend payments show that SkyWest has a trailing yield of 2.2% on the current share price of $25.19. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether SkyWest has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. SkyWest has a low and conservative payout ratio of just 7.2% of its income after tax. A useful secondary check can be to evaluate whether SkyWest generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 373% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we’re not grasping, this could signal a risk that the dividend may have to be cut in the future.
SkyWest paid out less in dividends than it reported in profits, but unfortunately it didn’t generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to SkyWest’s ability to maintain its dividend.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It’s encouraging to see SkyWest has grown its earnings rapidly, up 39% a year for the past five years. Earnings have been growing quickly, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, SkyWest has increased its dividend at approximately 13% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
The Bottom Line
Is SkyWest worth buying for its dividend? We like that SkyWest has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. Overall, it’s not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
On that note, you’ll want to research what risks SkyWest is facing. For instance, we’ve identified 3 warning signs for SkyWest (1 doesn’t sit too well with us) 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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