Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Scott Technology Limited (NZSE:SCT) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company’s books on the record date. Meaning, you will need to purchase Scott Technology’s shares before the 4th of November to receive the dividend, which will be paid on the 22nd of November.
The company’s upcoming dividend is NZ$0.04 a share, following on from the last 12 months, when the company distributed a total of NZ$0.08 per share to shareholders. Last year’s total dividend payments show that Scott Technology has a trailing yield of 2.7% on the current share price of NZ$2.91. 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.
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. Scott Technology paid out 50% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Scott Technology paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.
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. 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 Scott Technology earnings per share are up 3.6% per annum over the last five years.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Scott Technology’s dividend payments are effectively flat on where they were 10 years ago.
The Bottom Line
Is Scott Technology worth buying for its dividend? Scott Technology is paying out a reasonable percentage of its income and an uncomfortably high -104% of its cash flow as dividends. At least earnings per share have been growing steadily. Bottom line: Scott Technology has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Although, if you’re still interested in Scott Technology and want to know more, you’ll find it very useful to know what risks this stock faces. In terms of investment risks, we’ve identified 1 warning sign with Scott Technology and understanding them should be part of your investment process.
Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.
Valuation is complex, but we’re helping make it simple.
Find out whether Scott Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.