Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Science Applications International Corporation (NYSE:SAIC) is about to go ex-dividend in just 3 days. Investors can purchase shares before the 8th of April in order to be eligible for this dividend, which will be paid on the 24th of April.
Science Applications International's upcoming dividend is US$0.37 a share, following on from the last 12 months, when the company distributed a total of US$1.48 per share to shareholders. Last year's total dividend payments show that Science Applications International has a trailing yield of 2.1% on the current share price of $71.3. 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 investigate whether Science Applications International can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Fortunately Science Applications International's payout ratio is modest, at just 38% of profit. A useful secondary check can be to evaluate whether Science Applications International generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 20% of its 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?
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Science Applications International earnings per share are up 5.2% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, seven years ago, Science Applications International has lifted its dividend by approximately 4.1% 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.
To Sum It Up
Has Science Applications International got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Science Applications International 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 Science Applications International is halfway there. Overall we think this is an attractive combination and worthy of further research.
So while Science Applications International looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - Science Applications International has 4 warning signs we think you should be aware of.
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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