Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Rotork plc (LON:ROR) is about to trade ex-dividend in the next 3 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. Therefore, if you purchase Rotork's shares on or after the 18th of August, you won't be eligible to receive the dividend, when it is paid on the 23rd of September.
The company's next dividend payment will be UK£0.024 per share, on the back of last year when the company paid a total of UK£0.065 to shareholders. Based on the last year's worth of payments, Rotork has a trailing yield of 2.5% on the current stock price of £2.63. 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 investigate whether Rotork 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. Rotork paid out 73% of its earnings to investors last year, a normal payout level for most businesses. 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. It paid out 109% 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.
Rotork 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 Rotork's ability to maintain its dividend.
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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Rotork, with earnings per share up 2.6% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Rotork has delivered an average of 0.7% per year annual increase in its dividend, based on the past 10 years of dividend payments.
Has Rotork got what it takes to maintain its dividend payments? Rotork is paying out a reasonable percentage of its income and an uncomfortably high 109% of its cash flow as dividends. At least earnings per share have been growing steadily. Bottom line: Rotork has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Although, if you're still interested in Rotork and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 1 warning sign for Rotork that you should be aware of before investing in their shares.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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