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Should You Buy Anglo American plc (LON:AAL) For Its Upcoming Dividend In 3 Days?

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Anglo American plc (LON:AAL) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 15th of August will not receive this dividend, which will be paid on the 20th of September.

Anglo American's upcoming dividend is US$0.62 a share, following on from the last 12 months, when the company distributed a total of US$1.00 per share to shareholders. Based on the last year's worth of payments, Anglo American stock has a trailing yield of around 4.5% on the current share price of £18.424. If you buy this business for its dividend, you should have an idea of whether Anglo American's dividend is reliable and sustainable. So we need to investigate whether Anglo American can afford its dividend, and if the dividend could grow.

View our latest analysis for Anglo American

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Anglo American paid out a comfortable 35% of its profit last year. 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 distributed 40% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Anglo American'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.

LSE:AAL Historical Dividend Yield, August 11th 2019

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. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Anglo American's earnings have been skyrocketing, up 57% per annum for the past five years. Anglo American is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Anglo American has delivered an average of 8.0% per year annual increase in its dividend, based on the past 9 years of dividend payments. 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

Has Anglo American got what it takes to maintain its dividend payments? Anglo American has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past nine years, but the conservative payout ratio makes the current dividend look sustainable. Anglo American looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

Ever wonder what the future holds for Anglo American? See what the 16 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.