U.S. Markets close in 1 hr 4 mins

Is It Smart To Buy QinetiQ Group plc (LON:QQ.) Before It Goes Ex-Dividend?

Simply Wall St

QinetiQ Group plc (LON:QQ.) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 9th of January will not receive the dividend, which will be paid on the 7th of February.

QinetiQ Group's upcoming dividend is UK£0.022 a share, following on from the last 12 months, when the company distributed a total of UK£0.066 per share to shareholders. Based on the last year's worth of payments, QinetiQ Group stock has a trailing yield of around 1.8% on the current share price of £3.674. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether QinetiQ Group has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for QinetiQ Group

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. QinetiQ Group paid out a comfortable 30% of its profit last year. A useful secondary check can be to evaluate whether QinetiQ Group generated enough free cash flow to afford its dividend. Over the last year it paid out 70% of its free cash flow as dividends, within the usual 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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:QQ. Historical Dividend Yield, January 5th 2020

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 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, QinetiQ Group's earnings per share have been growing at 16% a year for the past five years. QinetiQ Group is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. QinetiQ Group has delivered an average of 3.3% per year annual increase in its dividend, based on the past ten years of dividend payments. 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.

The Bottom Line

Is QinetiQ Group an attractive dividend stock, or better left on the shelf? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. There's a lot to like about QinetiQ Group, and we would prioritise taking a closer look at it.

Wondering what the future holds for QinetiQ Group? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.