Norcros plc (LON:NXR) stock is about to trade ex-dividend in 4 days time. If you purchase the stock on or after the 28th of November, you won't be eligible to receive this dividend, when it is paid on the 10th of January.
Norcros's upcoming dividend is UK£0.031 a share, following on from the last 12 months, when the company distributed a total of UK£0.084 per share to shareholders. Last year's total dividend payments show that Norcros has a trailing yield of 3.4% on the current share price of £2.5. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Norcros can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Norcros's payout ratio is modest, at just 40% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Luckily it paid out just 22% of its free cash flow last year.
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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Norcros earnings per share are up 4.9% per annum over the last five years. Recent growth has not been impressive. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last nine years, Norcros has lifted its dividend by approximately 15% a year on average. 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.
The Bottom Line
From a dividend perspective, should investors buy or avoid Norcros? Earnings per share have been growing moderately, and Norcros is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. 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 Norcros is halfway there. It's a promising combination that should mark this company worthy of closer attention.
Curious what other investors think of Norcros? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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