Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Innospec Inc. (NASDAQ:IOSP) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 18th of November in order to be eligible for this dividend, which will be paid on the 27th of November.
Innospec's upcoming dividend is US$0.5 a share, following on from the last 12 months, when the company distributed a total of US$1.0 per share to shareholders. Looking at the last 12 months of distributions, Innospec has a trailing yield of approximately 1.0% on its current stock price of $99.83. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
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. Innospec has a low and conservative payout ratio of just 25% of its income after tax. A useful secondary check can be to evaluate whether Innospec generated enough free cash flow to afford its dividend. It paid out 17% of its free cash flow as dividends last year, which is conservatively low.
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?
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. This is why it's a relief to see Innospec earnings per share are up 4.8% per annum over the last five years. Innospec is retaining more than three-quarters of its earnings and has a history of generating some growth in earnings. We think this is a reasonable combination.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, Innospec has increased its dividend at approximately 26% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Is Innospec worth buying for its dividend? Earnings per share growth has been growing somewhat, and Innospec is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Innospec is halfway there. There's a lot to like about Innospec, and we would prioritise taking a closer look at it.
Keen to explore more data on Innospec's financial performance? Check out our visualisation of its historical revenue and earnings growth.
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.
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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.