Ferguson plc (LON:FERG) stock is about to trade ex-dividend in 3 days time. You can purchase shares before the 24th of October in order to receive the dividend, which the company will pay on the 28th of November.
Ferguson's upcoming dividend is UK£1.5 a share, following on from the last 12 months, when the company distributed a total of UK£2.1 per share to shareholders. Based on the last year's worth of payments, Ferguson stock has a trailing yield of around 2.5% on the current share price of £64.34. If you buy this business for its dividend, you should have an idea of whether Ferguson'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. Ferguson paid out a comfortable 45% of its profit last year. A useful secondary check can be to evaluate whether Ferguson generated enough free cash flow to afford its dividend. Over the last year it paid out 51% of its free cash flow as dividends, within the usual range for most companies.
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?
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Ferguson earnings per share are up 7.3% per annum over the last five years. Decent historical earnings per share growth suggests Ferguson has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Ferguson has delivered 16% dividend growth per year on average over the past nine years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Is Ferguson worth buying for its dividend? Earnings per share growth has been modest, and it's interesting that Ferguson is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
Curious what other investors think of Ferguson? See what analysts 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.
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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. Thank you for reading.