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Incitec Pivot Limited (ASX:IPL) Passed Our Checks, And It's About To Pay A AU$0.10 Dividend

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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 Incitec Pivot Limited (ASX:IPL) is about to go ex-dividend in just 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Incitec Pivot's shares before the 6th of June in order to receive the dividend, which the company will pay on the 5th of July.

The company's next dividend payment will be AU$0.10 per share, on the back of last year when the company paid a total of AU$0.20 to shareholders. Looking at the last 12 months of distributions, Incitec Pivot has a trailing yield of approximately 5.6% on its current stock price of A$3.58. If you buy this business for its dividend, you should have an idea of whether Incitec Pivot's dividend is reliable and sustainable. So we need to investigate whether Incitec Pivot can afford its dividend, and if the dividend could grow.

View our latest analysis for Incitec Pivot

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. Incitec Pivot is paying out an acceptable 72% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year it paid out 57% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Incitec Pivot's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Incitec Pivot's earnings have been skyrocketing, up 27% per annum for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Incitec Pivot has delivered 5.7% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because Incitec Pivot is keeping back more of its profits to grow the business.

The Bottom Line

Has Incitec Pivot got what it takes to maintain its dividend payments? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. However, we'd also note that Incitec Pivot is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. To summarise, Incitec Pivot looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So while Incitec Pivot looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, we've found 3 warning signs for Incitec Pivot (1 is significant!) that deserve your attention before investing in the shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.