Select Water Solutions (NYSE:WTTR) Could Be A Buy For Its Upcoming Dividend
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 Select Water Solutions, Inc. (NYSE:WTTR) is about to go ex-dividend in just four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Select Water Solutions' shares before the 6th of November in order to be eligible for the dividend, which will be paid on the 17th of November.
The company's next dividend payment will be US$0.06 per share, on the back of last year when the company paid a total of US$0.20 to shareholders. Calculating the last year's worth of payments shows that Select Water Solutions has a trailing yield of 2.7% on the current share price of $7.44. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Select Water Solutions
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. Fortunately Select Water Solutions's payout ratio is modest, at just 33% of profit. 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. It paid out 105% 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.
While Select Water Solutions's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Select Water Solutions to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
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. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Select Water Solutions earnings per share are up 8.8% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Unfortunately Select Water Solutions has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.
To Sum It Up
Is Select Water Solutions an attractive dividend stock, or better left on the shelf? Select Water Solutions delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 105% of its cash flow over the last year, which is a mediocre outcome. To summarise, Select Water Solutions looks okay on this analysis, although it doesn't appear a stand-out opportunity.
If you're not too concerned about Select Water Solutions's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. In terms of investment risks, we've identified 3 warning signs with Select Water Solutions and understanding them should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
