It looks like Electrocomponents plc (LON:ECM) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 28th of November will not receive this dividend, which will be paid on the 8th of January.
Electrocomponents's next dividend payment will be UK£0.059 per share, and in the last 12 months, the company paid a total of UK£0.15 per share. Looking at the last 12 months of distributions, Electrocomponents has a trailing yield of approximately 2.4% on its current stock price of £6.374. If you buy this business for its dividend, you should have an idea of whether Electrocomponents's dividend is reliable and sustainable. As a result, readers should always check whether Electrocomponents has been able to grow its dividends, or if the dividend might be cut.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Electrocomponents paid out a comfortable 47% of its profit last year. A useful secondary check can be to evaluate whether Electrocomponents generated enough free cash flow to afford its dividend. Over the past year it paid out 118% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.
Electrocomponents paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Electrocomponents's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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, Electrocomponents's earnings per share have been growing at 15% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, ten years ago, Electrocomponents has lifted its dividend by approximately 3.4% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
Should investors buy Electrocomponents for the upcoming dividend? We like that Electrocomponents has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.
Ever wonder what the future holds for Electrocomponents? See what the 12 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.
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