It looks like Diploma PLC (LON:DPLM) is about to go ex-dividend in the next 3 days. If you purchase the stock on or after the 28th of November, you won't be eligible to receive this dividend, when it is paid on the 22nd of January.
Diploma's next dividend payment will be UK£0.20 per share, on the back of last year when the company paid a total of UK£0.29 to shareholders. Looking at the last 12 months of distributions, Diploma has a trailing yield of approximately 1.6% on its current stock price of £17.66. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Diploma paid out 53% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Diploma generated enough free cash flow to afford its dividend. It paid out more than half (50%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that Diploma'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?
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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Diploma's earnings per share have been growing at 12% a year for the past five years. Diploma 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. Diploma has delivered an average of 14% per year annual increase in its dividend, based on the past ten years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
The Bottom Line
Is Diploma an attractive dividend stock, or better left on the shelf? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Diploma's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 53% and 50% respectively. Overall, it's hard to get excited about Diploma from a dividend perspective.
Ever wonder what the future holds for Diploma? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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 email@example.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.
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