Spirent Communications plc (LON:SPT) is about to trade ex-dividend in the next 3 days. You will need to purchase shares before the 12th of March to receive the dividend, which will be paid on the 1st of May.
Spirent Communications's upcoming dividend is UK£0.027 a share, following on from the last 12 months, when the company distributed a total of UK£0.054 per share to shareholders. Based on the last year's worth of payments, Spirent Communications has a trailing yield of 1.9% on the current stock price of £2.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Spirent Communications 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. Fortunately Spirent Communications's payout ratio is modest, at just 42% of profit. A useful secondary check can be to evaluate whether Spirent Communications generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 27% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. 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 Spirent Communications has grown its earnings rapidly, up 31% a year for the past five years. Spirent Communications is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Spirent Communications has lifted its dividend by approximately 13% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Should investors buy Spirent Communications for the upcoming dividend? It's great that Spirent Communications 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. It's a promising combination that should mark this company worthy of closer attention.
Ever wonder what the future holds for Spirent Communications? See what the eight 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.
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.
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