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XP Power Limited (LON:XPP) Pays A 0.8% In Just 4

Simply Wall St

XP Power Limited (LON:XPP) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 12th of September, you won't be eligible to receive this dividend, when it is paid on the 10th of October.

XP Power's upcoming dividend is UK£0.18 a share, following on from the last 12 months, when the company distributed a total of UK£0.85 per share to shareholders. Last year's total dividend payments show that XP Power has a trailing yield of 3.6% on the current share price of £23.7. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for XP Power

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. XP Power paid out 64% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether XP Power generated enough free cash flow to afford its dividend. It paid out 93% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

XP Power paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to XP Power's ability to maintain its dividend.

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

LSE:XPP Historical Dividend Yield, September 7th 2019

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see XP Power earnings per share are up 7.1% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, XP Power has increased its dividend at approximately 15% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid XP Power? Earnings per share have grown somewhat, although XP Power paid out over half its profits and the dividend was not well covered by free cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Curious what other investors think of XP Power? See what analysts 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.

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.

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. Thank you for reading.