It Might Not Be A Great Idea To Buy Linde plc (NYSE:LIN) For Its Next Dividend
It looks like Linde plc (NYSE:LIN) is about to go ex-dividend in the next four days. Investors can purchase shares before the 4th of March in order to be eligible for this dividend, which will be paid on the 22nd of March.
Linde's next dividend payment will be US$1.06 per share, on the back of last year when the company paid a total of US$4.24 to shareholders. Based on the last year's worth of payments, Linde stock has a trailing yield of around 1.7% on the current share price of $244.27. If you buy this business for its dividend, you should have an idea of whether Linde's dividend is reliable and sustainable. So we need to investigate whether Linde can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Linde
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. It paid out 81% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether Linde 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 Linde'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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see Linde's earnings per share have been shrinking at 2.5% a year over the previous five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Linde has lifted its dividend by approximately 8.9% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Linde is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Final Takeaway
Is Linde worth buying for its dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
With that in mind though, if the poor dividend characteristics of Linde don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 1 warning sign for Linde and you should be aware of this before buying any shares.
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.
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