Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Essentra plc (LON:ESNT) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 26th of September to receive the dividend, which will be paid on the 30th of October.
Essentra's upcoming dividend is UK£0.06 a share, following on from the last 12 months, when the company distributed a total of UK£0.2 per share to shareholders. Calculating the last year's worth of payments shows that Essentra has a trailing yield of 4.7% on the current share price of £4.372. If you buy this business for its dividend, you should have an idea of whether Essentra's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Essentra distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 past year it paid out 149% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
As Essentra's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Essentra's 10% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Essentra has increased its dividend at approximately 10% 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. Essentra is already paying out 136% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Is Essentra an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but Essentra is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Curious what other investors think of Essentra? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.