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We Wouldn't Be Too Quick To Buy Strattec Security Corporation (NASDAQ:STRT) Before It Goes Ex-Dividend

Simply Wall St

Strattec Security Corporation (NASDAQ:STRT) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 12th of March, you won't be eligible to receive this dividend, when it is paid on the 27th of March.

Strattec Security's next dividend payment will be US$0.14 per share, on the back of last year when the company paid a total of US$0.56 to shareholders. Based on the last year's worth of payments, Strattec Security stock has a trailing yield of around 2.6% on the current share price of $21.2. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Strattec Security

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Strattec Security distributed an unsustainably high 132% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. What's good is that dividends were well covered by free cash flow, with the company paying out 14% of its cash flow last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Strattec Security fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Strattec Security paid out over the last 12 months.

NasdaqGM:STRT Historical Dividend Yield, March 8th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Strattec Security's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 38% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Strattec Security has delivered 3.8% dividend growth per year on average over the past nine years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Strattec Security is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Should investors buy Strattec Security for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 132% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Strattec Security.

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 Strattec Security. To help with this, we've discovered 3 warning signs for Strattec Security (1 makes us a bit uncomfortable!) 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.