Smartgroup Corporation Ltd (ASX:SIQ) stock is about to trade ex-dividend in 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn’t show on the record date. This means that investors who purchase Smartgroup’s shares on or after the 6th of March will not receive the dividend, which will be paid on the 21st of March.
The company’s next dividend payment will be AU$0.32 per share. Last year, in total, the company distributed AU$0.47 to shareholders. Based on the last year’s worth of payments, Smartgroup has a trailing yield of 4.5% on the current stock price of AU$10.58. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Smartgroup can afford its dividend, and if the dividend could grow.
View our latest analysis for Smartgroup
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Smartgroup paid out more than half (66%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year it paid out 70% of its free cash flow as dividends, within the usual range for most companies.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we’re not enthused to see that Smartgroup’s earnings per share have remained effectively flat over the past five years. It’s better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company’s prospects for future growth.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last nine years, Smartgroup has lifted its dividend by approximately 26% a year on average.
To Sum It Up
Has Smartgroup got what it takes to maintain its dividend payments? Earnings per share have barely grown, and although Smartgroup paid out over half its earnings and free cash flow last year, the payout ratios are within a normal range for most companies. In summary, while it has some positive characteristics, we’re not inclined to race out and buy Smartgroup today.
If you want to look further into Smartgroup, it’s worth knowing the risks this business faces. Our analysis shows 1 warning sign for Smartgroup and you should be aware of it before buying any shares.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.