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Austal Limited (ASX:ASB) Passed Our Checks, And It's About To Pay A AU$0.03 Dividend

Simply Wall St

Austal Limited (ASX:ASB) stock is about to trade ex-dividend in 4 days time. If you purchase the stock on or after the 16th of March, you won't be eligible to receive this dividend, when it is paid on the 17th of April.

Austal's upcoming dividend is AU$0.03 a share, following on from the last 12 months, when the company distributed a total of AU$0.06 per share to shareholders. Calculating the last year's worth of payments shows that Austal has a trailing yield of 1.8% on the current share price of A$3.26. If you buy this business for its dividend, you should have an idea of whether Austal's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Austal

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. Austal paid out a comfortable 27% of its profit last year. 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 distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Austal'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.

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

ASX:ASB Historical Dividend Yield, March 11th 2020

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. Fortunately for readers, Austal's earnings per share have been growing at 19% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Austal's dividend payments are effectively flat on where they were ten years ago.

To Sum It Up

Has Austal got what it takes to maintain its dividend payments? It's great that Austal is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. Overall we think this is an attractive combination and worthy of further research.

In light of that, while Austal has an appealing dividend, it's worth knowing the risks involved with this stock. Case in point: We've spotted 1 warning sign for Austal you should be aware of.

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.

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.

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. Thank you for reading.