Readers hoping to buy Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 14th of January will not receive this dividend, which will be paid on the 1st of February.
Schnitzer Steel Industries's next dividend payment will be US$0.19 per share, and in the last 12 months, the company paid a total of US$0.75 per share. Based on the last year's worth of payments, Schnitzer Steel Industries stock has a trailing yield of around 2.0% on the current share price of $37.18. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Schnitzer Steel Industries has been able to grow its dividends, or if the dividend might be cut.
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. Schnitzer Steel Industries distributed an unsustainably high 122% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Schnitzer Steel Industries paid out more free cash flow than it generated - 129%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Cash is slightly more important than profit from a dividend perspective, but given Schnitzer Steel Industries's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Schnitzer Steel Industries's earnings have been skyrocketing, up 33% per annum for the past five years. Earnings per share have been growing rapidly, but the company is paying out a dividend that looks unsustainably high. Generally, when a company is paying out more than it earned as dividends, it could signal either that the company is spending heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Schnitzer Steel Industries has lifted its dividend by approximately 27% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Is Schnitzer Steel Industries worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not that we think Schnitzer Steel Industries is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Schnitzer Steel Industries. Our analysis shows 5 warning signs for Schnitzer Steel Industries and you should be aware of them before buying any 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.
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