Aristocrat Leisure Limited (ASX:ALL) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 28th of November will not receive the dividend, which will be paid on the 17th of December.
Aristocrat Leisure's next dividend payment will be AU$0.34 per share. Last year, in total, the company distributed AU$0.56 to shareholders. Based on the last year's worth of payments, Aristocrat Leisure has a trailing yield of 1.6% on the current stock price of A$34.49. If you buy this business for its dividend, you should have an idea of whether Aristocrat Leisure's dividend is reliable and sustainable. So we need to investigate whether Aristocrat Leisure 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. Aristocrat Leisure is paying out an acceptable 51% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Aristocrat Leisure generated enough free cash flow to afford its dividend. Fortunately, it paid out only 41% of its free cash flow in the past year.
It's positive to see that Aristocrat Leisure'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?
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. That's why it's comforting to see Aristocrat Leisure's earnings have been skyrocketing, up 40% per annum for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Aristocrat Leisure could have strong prospects for future increases to the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Aristocrat Leisure has increased its dividend at approximately 4.5% a year on average. 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.
From a dividend perspective, should investors buy or avoid Aristocrat Leisure? Aristocrat Leisure'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. It's a promising combination that should mark this company worthy of closer attention.
Curious what other investors think of Aristocrat Leisure? See what analysts 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 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.
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