U.S. Markets closed

Do These 3 Checks Before Buying Rathbone Brothers Plc (LON:RAT) For Its Upcoming Dividend

Simply Wall St

Rathbone Brothers Plc (LON:RAT) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 5th of September will not receive this dividend, which will be paid on the 1st of October.

Rathbone Brothers's next dividend payment will be UK£0.25 per share, on the back of last year when the company paid a total of UK£0.66 to shareholders. Based on the last year's worth of payments, Rathbone Brothers stock has a trailing yield of around 3.0% on the current share price of £22.3. 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 Rathbone Brothers has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Rathbone Brothers

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Rathbone Brothers paid out 142% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

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

LSE:RAT Historical Dividend Yield, September 1st 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Rathbone Brothers's earnings per share have fallen at approximately 9.1% a year over the previous 5 years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Rathbone Brothers has increased its dividend at approximately 4.6% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Rathbone Brothers is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

Should investors buy Rathbone Brothers for the upcoming dividend? Earnings per share are in decline and Rathbone Brothers is paying out what we feel is an uncomfortably high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

Ever wonder what the future holds for Rathbone Brothers? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.