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Readers hoping to buy ALS Limited (ASX:ALQ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 26th of November will not receive this dividend, which will be paid on the 16th of December.
ALS's next dividend payment will be AU$0.085 per share, and in the last 12 months, the company paid a total of AU$0.18 per share. Looking at the last 12 months of distributions, ALS has a trailing yield of approximately 1.7% on its current stock price of A$10.25. If you buy this business for its dividend, you should have an idea of whether ALS'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.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. ALS paid out 119% 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. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (57%) of its free cash flow in the past year, which is within an average range for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and ALS fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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 ALS has grown its earnings rapidly, up 56% a year for the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. ALS's dividend payments per share have declined at 0.8% per year on average over the past 10 years, which is uninspiring.
To Sum It Up
Should investors buy ALS for the upcoming dividend? Growing earnings per share and a normal cashflow payout ratio is an ok combination, but we're concerned that the company is paying out such a high percentage of its income as dividends. All things considered, we are not particularly enthused about ALS from a dividend perspective.
If you're not too concerned about ALS's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. In terms of investment risks, we've identified 3 warning signs with ALS and understanding them should be part of your investment process.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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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