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 The Scotts Miracle-Gro Company (NYSE:SMG) is about to go ex-dividend in just 2 days. Investors can purchase shares before the 26th of May in order to be eligible for this dividend, which will be paid on the 10th of June.
Scotts Miracle-Gro's next dividend payment will be US$0.58 per share, on the back of last year when the company paid a total of US$2.32 to shareholders. Looking at the last 12 months of distributions, Scotts Miracle-Gro has a trailing yield of approximately 1.5% on its current stock price of $150.7. 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 typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. That's why it's good to see Scotts Miracle-Gro paying out a modest 42% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Scotts Miracle-Gro paid out more free cash flow than it generated - 112%, to be precise - last year, which we think is concerningly 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.
Scotts Miracle-Gro 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 Scotts Miracle-Gro's ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Scotts Miracle-Gro's earnings per share have been growing at 18% 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. Scotts Miracle-Gro has delivered 17% dividend growth per year on average over the past ten years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
The Bottom Line
Should investors buy Scotts Miracle-Gro for the upcoming dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Scotts Miracle-Gro's dividend merits.
So while Scotts Miracle-Gro looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Be aware that Scotts Miracle-Gro is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
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.
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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. Thank you for reading.