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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Strategic Education, Inc. (NASDAQ:STRA) is about to go ex-dividend in just three days. You will need to purchase shares before the 5th of March to receive the dividend, which will be paid on the 15th of March.
Strategic Education's next dividend payment will be US$0.60 per share, on the back of last year when the company paid a total of US$2.40 to shareholders. Based on the last year's worth of payments, Strategic Education has a trailing yield of 2.6% on the current stock price of $90.92. If you buy this business for its dividend, you should have an idea of whether Strategic Education's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. Strategic Education is paying out an acceptable 63% 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 more than half (58%) of its free cash flow in the past year, which is within an average 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?
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Strategic Education'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. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
Strategic Education also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Strategic Education's dividend payments per share have declined at 2.2% per year on average over the past 10 years, which is uninspiring.
Has Strategic Education got what it takes to maintain its dividend payments? Earnings per share have barely grown, and although Strategic Education paid out over half its earnings and free cash flow last year, the payout ratios are within a normal range for most companies. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
So if you want to do more digging on Strategic Education, you'll find it worthwhile knowing the risks that this stock faces. In terms of investment risks, we've identified 3 warning signs with Strategic Education and understanding them should be part of your investment process.
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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