Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tristel plc (LON:TSTL) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 19th of November in order to be eligible for this dividend, which will be paid on the 18th of December.
Tristel's next dividend payment will be UK£0.038 per share, and in the last 12 months, the company paid a total of UK£0.062 per share. Based on the last year's worth of payments, Tristel stock has a trailing yield of around 1.2% on the current share price of £5.2. 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 check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Tristel paid out more than half (54%) of its earnings last year, which is a regular payout ratio for most companies. 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. Dividends consumed 57% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Tristel'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.
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Tristel's earnings per share have risen 16% per annum over the last five years. Tristel has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Tristel has lifted its dividend by approximately 13% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
From a dividend perspective, should investors buy or avoid Tristel? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Tristel's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 54% and 57% respectively. All things considered, we are not particularly enthused about Tristel from a dividend perspective.
So while Tristel looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - Tristel has 1 warning sign we think you should be aware of.
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.
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. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.