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Should Income Investors Look At Sandfire Resources NL (ASX:SFR) Before Its Ex-Dividend?

Simply Wall St

Readers hoping to buy Sandfire Resources NL (ASX:SFR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 14th of November in order to be eligible for this dividend, which will be paid on the 29th of November.

Sandfire Resources's next dividend payment will be AU$0.2 per share, on the back of last year when the company paid a total of AU$0.2 to shareholders. Based on the last year's worth of payments, Sandfire Resources has a trailing yield of 3.7% on the current stock price of A$6.29. If you buy this business for its dividend, you should have an idea of whether Sandfire Resources's dividend is reliable and sustainable. So we need to investigate whether Sandfire Resources can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Sandfire Resources

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Sandfire Resources's payout ratio is modest, at just 35% of profit. A useful secondary check can be to evaluate whether Sandfire Resources generated enough free cash flow to afford its dividend. The company paid out 91% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Sandfire Resources paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Sandfire Resources's ability to maintain its dividend.

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

ASX:SFR Historical Dividend Yield, November 9th 2019

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 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 Sandfire Resources earnings per share are up 5.4% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, five years ago, Sandfire Resources has lifted its dividend by approximately 18% 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.

Final Takeaway

Is Sandfire Resources an attractive dividend stock, or better left on the shelf? Sandfire Resources delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 91% of its cash flow over the last year, which is a mediocre outcome. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

Wondering what the future holds for Sandfire Resources? See what the 13 analysts we track 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.