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Is It Worth Considering Link Administration Holdings Limited (ASX:LNK) For Its Upcoming Dividend?

Simply Wall St

Link Administration Holdings Limited (ASX:LNK) stock is about to trade ex-dividend in 2 days time. This means that investors who purchase shares on or after the 4th of March will not receive the dividend, which will be paid on the 9th of April.

Link Administration Holdings's next dividend payment will be AU$0.065 per share. Last year, in total, the company distributed AU$0.19 to shareholders. Based on the last year's worth of payments, Link Administration Holdings has a trailing yield of 4.0% on the current stock price of A$4.7. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Link Administration Holdings

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Link Administration Holdings paid out more than half (63%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 66% 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 Link Administration Holdings'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.

ASX:LNK Historical Dividend Yield, March 1st 2020

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Link Administration Holdings's earnings have been skyrocketing, up 44% 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, Link Administration Holdings could have strong prospects for future increases to the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Link Administration Holdings has delivered an average of 24% per year annual increase in its dividend, based on the past four years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

The Bottom Line

Is Link Administration Holdings worth buying for its dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Link Administration Holdings's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 63% and 66% respectively. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Link Administration Holdings's dividend merits.

Ever wonder what the future holds for Link Administration Holdings? See what the nine analysts we track 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 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.