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Waterco (ASX:WAT) Could Be A Buy For Its Upcoming Dividend

Simply Wall St
·3 min read

Waterco Limited (ASX:WAT) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 6th of November will not receive this dividend, which will be paid on the 16th of December.

Waterco's next dividend payment will be AU$0.03 per share, on the back of last year when the company paid a total of AU$0.05 to shareholders. Last year's total dividend payments show that Waterco has a trailing yield of 1.7% on the current share price of A$2.91. 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 check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Waterco

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. Waterco paid out 57% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Waterco generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 18% of its cash flow last year.

It's positive to see that Waterco'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 how much of its profit Waterco paid out over the last 12 months.

historic-dividend
historic-dividend

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Waterco's earnings per share have risen 16% per annum over the last five years. Waterco has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. 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. Waterco's dividend payments per share have declined at 1.8% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

Should investors buy Waterco for the upcoming dividend? Waterco's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. Waterco looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while Waterco has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 1 warning sign for Waterco that you should be aware of before investing in their shares.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.