Is It Smart To Buy Select Harvests Limited (ASX:SHV) Before It Goes Ex-Dividend?

Simply Wall St

Select Harvests Limited (ASX:SHV) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 12th of December, you won't be eligible to receive this dividend, when it is paid on the 6th of January.

Select Harvests's next dividend payment will be AU$0.20 per share. Last year, in total, the company distributed AU$0.40 to shareholders. Last year's total dividend payments show that Select Harvests has a trailing yield of 4.8% on the current share price of A$8.3. If you buy this business for its dividend, you should have an idea of whether Select Harvests's dividend is reliable and sustainable. As a result, readers should always check whether Select Harvests has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Select Harvests

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. Select Harvests paid out 58% 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. Thankfully its dividend payments took up just 35% of the free cash flow it generated, which is a comfortable payout ratio.

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.

ASX:SHV Historical Dividend Yield, December 7th 2019

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. This is why it's a relief to see Select Harvests earnings per share are up 9.3% per annum over the last five years. Decent historical earnings per share growth suggests Select Harvests has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

Select Harvests also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Select Harvests has delivered 1.3% dividend growth per year on average over the past ten years.

Final Takeaway

From a dividend perspective, should investors buy or avoid Select Harvests? Earnings per share growth has been modest and Select Harvests paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

Curious what other investors think of Select Harvests? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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