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Don't Race Out To Buy Synectics plc (LON:SNX) Just Because It's Going Ex-Dividend

Simply Wall St

Readers hoping to buy Synectics plc (LON:SNX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 22nd of August in order to be eligible for this dividend, which will be paid on the 20th of September.

Synectics's upcoming dividend is UK£0.013 a share, following on from the last 12 months, when the company distributed a total of UK£0.047 per share to shareholders. Looking at the last 12 months of distributions, Synectics has a trailing yield of approximately 2.4% on its current stock price of £1.96. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Synectics has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Synectics

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. Synectics paid out 51% of its earnings to investors last year, a normal payout level for most businesses. 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'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.

Click here to see how much of its profit Synectics paid out over the last 12 months.

AIM:SNX Historical Dividend Yield, August 18th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Synectics's earnings per share have dropped 21% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Synectics has seen its dividend decline 3.9% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Synectics worth buying for its dividend? Synectics had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Synectics.

Want to learn more about Synectics? Here's a visualisation of its historical rate of revenue and earnings growth.

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.