Electrocomponents plc (LON:ECM) Looks Interesting, And It's About To Pay A Dividend
Readers hoping to buy Electrocomponents plc (LON:ECM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 19th of November to receive the dividend, which will be paid on the 18th of December.
Electrocomponents's next dividend payment will be UK£0.095 per share, and in the last 12 months, the company paid a total of UK£0.16 per share. Calculating the last year's worth of payments shows that Electrocomponents has a trailing yield of 1.9% on the current share price of £8.14. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Check out our latest analysis for Electrocomponents
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. Electrocomponents paid out 54% of its earnings to investors last year, a normal payout level for most businesses. 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. Luckily it paid out just 18% of its free cash flow last year.
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.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Electrocomponents's earnings per share have risen 13% per annum over the last five years. Electrocomponents has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Electrocomponents has delivered an average of 3.6% per year annual increase in its dividend, based on the past 10 years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Electrocomponents is keeping back more of its profits to grow the business.
The Bottom Line
Has Electrocomponents got what it takes to maintain its dividend payments? We like Electrocomponents's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. Electrocomponents looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Electrocomponents for the dividends alone, you should always be mindful of the risks involved. For example - Electrocomponents has 1 warning sign we think you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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