Service Stream Limited (ASX:SSM) Is About To Go Ex-Dividend, And It Pays A 7.4% Yield
Service Stream Limited (ASX:SSM) is about to trade ex-dividend in the next four days. Investors can purchase shares before the 25th of March in order to be eligible for this dividend, which will be paid on the 14th of April.
Service Stream's next dividend payment will be AU$0.025 per share, and in the last 12 months, the company paid a total of AU$0.09 per share. Based on the last year's worth of payments, Service Stream has a trailing yield of 7.4% on the current stock price of A$1.22. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Service Stream can afford its dividend, and if the dividend could grow.
See our latest analysis for Service Stream
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. Its dividend payout ratio is 80% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. 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. Dividends consumed 59% 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 Service Stream'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.
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. 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 encouraging to see Service Stream has grown its earnings rapidly, up 24% a year for the past five years. The company is paying out more than three-quarters of its earnings, but it is also generating strong earnings growth.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, nine years ago, Service Stream has lifted its dividend by approximately 17% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Is Service Stream an attractive dividend stock, or better left on the shelf? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. However, we'd also note that Service Stream is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
While it's tempting to invest in Service Stream for the dividends alone, you should always be mindful of the risks involved. To help with this, we've discovered 2 warning signs for Service Stream that you should be aware of before investing in their shares.
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.
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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