Reece Limited (ASX:REH) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 8th of October will not receive the dividend, which will be paid on the 30th of October.
Reece's next dividend payment will be AU$0.1 per share. Last year, in total, the company distributed AU$0.2 to shareholders. Based on the last year's worth of payments, Reece has a trailing yield of 1.9% on the current stock price of A$10.64. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Reece can afford its dividend, and if the dividend could grow.
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. Reece is paying out an acceptable 56% of its profit, a common payout level among most companies. 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. It paid out 76% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.
It's positive to see that Reece's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Reece earnings per share are up 7.8% per annum over the last five years. Decent historical earnings per share growth suggests Reece has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, Reece has lifted its dividend by approximately 6.3% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is Reece worth buying for its dividend? Earnings per share have been growing modestly and Reece paid out a bit over half of its earnings and free cash flow last year. In summary, while it has some positive characteristics, we're not inclined to race out and buy Reece today.
Curious what other investors think of Reece? See what analysts 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.