Readers hoping to buy SGS SA( VTX:SGSN ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. In other words, investors can purchase SGS' shares before the 2nd of April in order to be eligible for the dividend, which will be paid on the 24th of April.
The company's next dividend payment will be CHF03.20 per share, on the back of last year when the company paid a total of CHF3.20 to shareholders. Based on the last year's worth of payments, SGS stock has a trailing yield of around 3.8% on the current share price of CHF083.82. 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 SGS can afford its dividend, and if the dividend could grow.
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. Last year, SGS paid out 92% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. The good news is it paid out just 23% of its free cash flow in the last year.
It's good to see that while SGS's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.
Check out our latest analysis for SGS
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see SGS earnings per share are up 6.2% 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. SGS has delivered an average of 1.6% per year annual increase in its dividend, based on the past 10 years of dividend payments.
Final Takeaway
Is SGS worth buying for its dividend? Earnings per share have grown modestly, and last year SGS paid out a low percentage of its cash flow. However, its dividend payments were not well covered by profits. In summary, it's hard to get excited about SGS from a dividend perspective.
However if you're still interested in SGS as a potential investment, you should definitely consider some of the risks involved with SGS. In terms of investment risks, we've identified 2 warning signs with SGS and understanding them should be part of your investment process.
If you're in the market for strong dividend payers, we recommend checking our selection of top 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.
