Should You Buy Allied Electronics Corporation Limited (JSE:AEL) For Its Upcoming Dividend?

Allied Electronics Corporation Limited (JSE:AEL) is about to trade ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 12th of May will not receive this dividend, which will be paid on the 17th of May.

The upcoming dividend for Allied Electronics is R0.96 per share, increased from last year's total dividends per share of R0.55. If you buy this business for its dividend, you should have an idea of whether Allied Electronics's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Allied Electronics

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 Allied Electronics's payout ratio is modest, at just 29% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 23% of its free cash flow last year.

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 how much of its profit Allied Electronics paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Allied Electronics earnings per share are up 7.8% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Allied Electronics's dividend payments per share have declined at 6.5% per year on average over the past 10 years, which is uninspiring. Allied Electronics is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

Is Allied Electronics worth buying for its dividend? Earnings per share growth has been growing somewhat, and Allied Electronics is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Allied Electronics is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Allied Electronics, and we would prioritise taking a closer look at it.

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