It looks like Sims Metal Management Limited (ASX:SGM) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 3rd of October will not receive this dividend, which will be paid on the 18th of October.
Sims Metal Management's next dividend payment will be AU$0.2 per share, on the back of last year when the company paid a total of AU$0.4 to shareholders. Looking at the last 12 months of distributions, Sims Metal Management has a trailing yield of approximately 4.1% on its current stock price of A$10.24. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Sims Metal Management paid out 56% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Sims Metal Management generated enough free cash flow to afford its dividend. Dividends consumed 66% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's positive to see that Sims Metal Management'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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Sims Metal Management's earnings have been skyrocketing, up 57% per annum for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. Earnings per share have been growing quickly and in combination with some reinvestment and a middling payout ratio, the stock may have decent dividend prospects going forwards.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Sims Metal Management's dividend payments per share have declined at 7.6% per year on average over the past ten years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.
Has Sims Metal Management got what it takes to maintain its dividend payments? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we'd also note that Sims Metal Management is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. To summarise, Sims Metal Management looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Curious what other investors think of Sims Metal Management? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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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