Ultra Electronics Holdings plc (LON:ULE) stock is about to trade ex-dividend in 3 days time. Investors can purchase shares before the 29th of August in order to be eligible for this dividend, which will be paid on the 20th of September.
Ultra Electronics Holdings's next dividend payment will be UK£0.15 per share, and in the last 12 months, the company paid a total of UK£0.52 per share. Looking at the last 12 months of distributions, Ultra Electronics Holdings has a trailing yield of approximately 2.4% on its current stock price of £21.62. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Ultra Electronics Holdings 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. Its dividend payout ratio is 78% 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 worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Ultra Electronics Holdings generated enough free cash flow to afford its dividend. It distributed 48% of its free cash flow as dividends, a comfortable payout level 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.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Ultra Electronics Holdings earnings per share are up 4.0% per annum over the last five years. A payout ratio of 78% looks like a tacit signal from management that reinvestment opportunities in the business are low. In line with limited earnings growth in recent years, this is not the most appealing combination.
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, 10 years ago, Ultra Electronics Holdings has lifted its dividend by approximately 7.1% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Has Ultra Electronics Holdings got what it takes to maintain its dividend payments? Earnings per share growth has been modest and Ultra Electronics Holdings paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. Overall, it's hard to get excited about Ultra Electronics Holdings from a dividend perspective.
Wondering what the future holds for Ultra Electronics Holdings? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.