ALS Limited (ASX:ALQ) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 27th of November will not receive this dividend, which will be paid on the 16th of December.
ALS's upcoming dividend is AU$0.12 a share, following on from the last 12 months, when the company distributed a total of AU$0.23 per share to shareholders. Based on the last year's worth of payments, ALS has a trailing yield of 2.6% on the current stock price of A$8.72. If you buy this business for its dividend, you should have an idea of whether ALS's dividend is reliable and sustainable. 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. ALS is paying out an acceptable 67% of its profit, a common payout level among 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. It paid out 102% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
ALS paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were ALS to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. So we're not too excited that ALS's earnings are down 3.1% a year over the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. ALS's dividend payments are broadly unchanged compared to where they were ten years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.
The Bottom Line
Is ALS an attractive dividend stock, or better left on the shelf? ALS had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not that we think ALS is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Ever wonder what the future holds for ALS? See what the nine analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.