Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see XP Power Limited (LON:XPP) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 10th of September in order to receive the dividend, which the company will pay on the 9th of October.
XP Power's upcoming dividend is UK£0.18 a share, following on from the last 12 months, when the company distributed a total of UK£0.72 per share to shareholders. Based on the last year's worth of payments, XP Power has a trailing yield of 1.6% on the current stock price of £44.2. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. XP Power paid out a comfortable 40% of its profit last year. A useful secondary check can be to evaluate whether XP Power generated enough free cash flow to afford its dividend. Fortunately, it paid out only 34% of its free cash flow in the past year.
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?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that XP Power's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.
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, 10 years ago, XP Power has lifted its dividend by approximately 13% a year on average.
The Bottom Line
Is XP Power worth buying for its dividend? Earnings per share have been flat, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend gets cut. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of XP Power's dividend merits.
In light of that, while XP Power has an appealing dividend, it's worth knowing the risks involved with this stock. In terms of investment risks, we've identified 4 warning signs with XP Power and understanding them should be part of your investment process.
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.
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.
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