It looks like PWR Holdings Limited (ASX:PWH) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 17th of March will not receive this dividend, which will be paid on the 27th of March.
PWR Holdings's upcoming dividend is AU$0.019 a share, following on from the last 12 months, when the company distributed a total of AU$0.088 per share to shareholders. Calculating the last year's worth of payments shows that PWR Holdings has a trailing yield of 2.4% on the current share price of A$3.73. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether PWR Holdings can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. PWR Holdings paid out more than half (61%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether PWR Holdings generated enough free cash flow to afford its dividend. Over the last year it paid out 62% of its free cash flow as dividends, within the usual range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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 fall far enough, the company could be forced to cut its dividend. Fortunately for readers, PWR Holdings's earnings per share have been growing at 15% a year for the past five years. PWR Holdings is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past four years, PWR Holdings has increased its dividend at approximately 63% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Has PWR Holdings 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 PWR Holdings is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. All things considered, we are not particularly enthused about PWR Holdings from a dividend perspective.
While it's tempting to invest in PWR Holdings for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 1 warning sign for PWR Holdings that you should be aware of before investing in their shares.
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.
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