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Is It Worth Considering DXC Technology Company (NYSE:DXC) For Its Upcoming Dividend?

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see DXC Technology Company (NYSE:DXC) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 24th of March will not receive the dividend, which will be paid on the 14th of April.

DXC Technology's next dividend payment will be US$0.21 per share. Last year, in total, the company distributed US$0.84 to shareholders. Looking at the last 12 months of distributions, DXC Technology has a trailing yield of approximately 9.0% on its current stock price of $9.31. 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 investigate whether DXC Technology can afford its dividend, and if the dividend could grow.

Check out our latest analysis for DXC Technology

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. DXC Technology paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If DXC Technology 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 9.5% of its free cash flow last year.

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

NYSE:DXC Historical Dividend Yield, March 19th 2020

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. DXC Technology was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. DXC Technology has delivered an average of 3.4% per year annual increase in its dividend, based on the past ten years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because DXC Technology is keeping back more of its profits to grow the business.

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

Final Takeaway

Should investors buy DXC Technology for the upcoming dividend? It's hard to get used to DXC Technology paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. In summary, it's hard to get excited about DXC Technology from a dividend perspective.

So while DXC Technology looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To help with this, we've discovered 3 warning signs for DXC Technology (1 shouldn't be ignored!) that you ought to be aware of before buying the shares.

If you're in the market for dividend stocks, we recommend checking our list of top 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.