Innospec Inc. (NASDAQ:IOSP) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 14th of May will not receive this dividend, which will be paid on the 26th of May.

Innospec's next dividend payment will be US$0.57 per share, on the back of last year when the company paid a total of US$1.14 to shareholders. Based on the last year's worth of payments, Innospec stock has a trailing yield of around 1.1% on the current share price of $102.54. If you buy this business for its dividend, you should have an idea of whether Innospec's dividend is reliable and sustainable. So we need to investigate whether Innospec can afford its dividend, and if the dividend could grow.

See our latest analysis for Innospec

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. Innospec paid out 135% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 19% of its cash flow last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Innospec fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Innospec's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 31% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past eight years, Innospec has increased its dividend at approximately 11% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Innospec is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Innospec worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 135% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Innospec has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Innospec and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 2 warning signs for Innospec you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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. 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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