Southern Cross Electrical Engineering Limited (ASX:SXE) stock is about to trade ex-dividend in 4 days time. You can purchase shares before the 25th of September in order to receive the dividend, which the company will pay on the 10th of October.
Southern Cross Electrical Engineering's upcoming dividend is AU$0.03 a share, following on from the last 12 months, when the company distributed a total of AU$0.03 per share to shareholders. Based on the last year's worth of payments, Southern Cross Electrical Engineering has a trailing yield of 5.1% on the current stock price of A$0.59. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. Southern Cross Electrical Engineering paid out more than half (55%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year, it paid out more than three-quarters (81%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
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.
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. With that in mind, we're encouraged by the steady growth at Southern Cross Electrical Engineering, with earnings per share up 2.6% on average over the last five years. A payout ratio of 55% looks like a tacit signal from management that reinvestment opportunities in the business are low. In line with limited earnings growth in recent years, this is not the most appealing combination.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Southern Cross Electrical Engineering's dividend payments per share have declined at 9.3% per year on average over the past ten years, which is uninspiring. Southern Cross Electrical Engineering is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
To Sum It Up
Should investors buy Southern Cross Electrical Engineering for the upcoming dividend? Earnings per share have been growing modestly and Southern Cross Electrical Engineering paid out a bit over half of its earnings and free cash flow last year. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.
Keen to explore more data on Southern Cross Electrical Engineering's financial performance? Check out our visualisation of its historical revenue and earnings growth.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.