Readers hoping to buy Steelcase Inc. (NYSE:SCS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 24th of December in order to be eligible for this dividend, which will be paid on the 11th of January.
Steelcase's next dividend payment will be US$0.10 per share. Last year, in total, the company distributed US$0.40 to shareholders. Last year's total dividend payments show that Steelcase has a trailing yield of 2.9% on the current share price of $13.6. 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 investigate whether Steelcase can afford its dividend, and if the dividend could grow.
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. Steelcase paid out more than half (58%) of its earnings last year, which is a regular payout ratio for most companies. 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. Fortunately, it paid out only 40% of its free cash flow in the past year.
It's positive to see that Steelcase'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 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Steelcase's earnings are 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Steelcase has increased its dividend at approximately 9.6% a year on average.
To Sum It Up
Has Steelcase got what it takes to maintain its dividend payments? It's unfortunate that earnings per share have not grown, and we'd note that Steelcase is paying out lower percentage of its cashflow than its profit, but overall the dividend looks well covered by earnings. To summarise, Steelcase looks okay on this analysis, although it doesn't appear a stand-out opportunity.
While it's tempting to invest in Steelcase for the dividends alone, you should always be mindful of the risks involved. For example - Steelcase has 5 warning signs we think you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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