U.S. Markets closed

Should Income Investors Look At Sanford Limited (NZSE:SAN) Before Its Ex-Dividend?

Simply Wall St

Sanford Limited (NZSE:SAN) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 27th of November, you won't be eligible to receive this dividend, when it is paid on the 6th of December.

Sanford's next dividend payment will be NZ$0.16 per share, and in the last 12 months, the company paid a total of NZ$0.23 per share. Calculating the last year's worth of payments shows that Sanford has a trailing yield of 3.1% on the current share price of NZ$7.4. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Sanford

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Sanford paid out more than half (52%) of its earnings last year, which is a regular payout ratio for 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 73% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Sanford'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.

NZSE:SAN Historical Dividend Yield, November 22nd 2019

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Sanford earnings per share are up 4.4% per annum over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the Sanford dividends are largely the same as they were ten years ago.

The Bottom Line

From a dividend perspective, should investors buy or avoid Sanford? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Sanford's dividend merits.

Curious what other investors think of Sanford? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

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.

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. Thank you for reading.