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Why It Might Not Make Sense To Buy ADT Inc. (NYSE:ADT) For Its Upcoming Dividend

Simply Wall St

ADT Inc. (NYSE:ADT) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 18th of March will not receive the dividend, which will be paid on the 2nd of April.

ADT's next dividend payment will be US$0.035 per share. Last year, in total, the company distributed US$0.14 to shareholders. Based on the last year's worth of payments, ADT stock has a trailing yield of around 2.9% on the current share price of $4.83. 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! As a result, readers should always check whether ADT has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for ADT

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. ADT's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If ADT didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Luckily it paid out just 19% of its free cash flow last year.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NYSE:ADT Historical Dividend Yield, March 13th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. ADT was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. It looks like the ADT dividends are largely the same as they were two years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Remember, you can always get a snapshot of ADT's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Has ADT got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Although, if you're still interested in ADT and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 3 warning signs with ADT and understanding them should be part of your investment process.

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 editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.