Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Integrated Research Limited (ASX:IRI) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 2nd of September to receive the dividend, which will be paid on the 15th of October.
Integrated Research's next dividend payment will be AU$0.037 per share, and in the last 12 months, the company paid a total of AU$0.072 per share. Looking at the last 12 months of distributions, Integrated Research has a trailing yield of approximately 2.5% on its current stock price of A$2.94. 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! 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. Integrated Research is paying out an acceptable 57% 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. Integrated Research paid out more free cash flow than it generated - 139%, 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.
Integrated Research 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 Integrated Research'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. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Integrated Research's earnings have been skyrocketing, up 20% per annum 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Integrated Research has delivered an average of 9.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Has Integrated Research got what it takes to maintain its dividend payments? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 139% of its cashflow, which is uncomfortably high. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Integrated Research's dividend merits.
Wondering what the future holds for Integrated Research? See what the two 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 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. Thank you for reading.