Scott Technology Limited (NZSE:SCT) stock is about to trade ex-dividend in 4 days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Scott Technology's shares on or after the 5th of November will not receive the dividend, which will be paid on the 24th of November.
The company's next dividend payment will be NZ$0.0588235 per share, on the back of last year when the company paid a total of NZ$0.09 to shareholders. Looking at the last 12 months of distributions, Scott Technology has a trailing yield of approximately 3.5% on its current stock price of NZ$2.55. If you buy this business for its dividend, you should have an idea of whether Scott Technology's dividend is reliable and sustainable. So we need to investigate whether Scott Technology can afford its dividend, and if the dividend could grow.
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. That's why it's good to see Scott Technology paying out a modest 49% of its earnings. 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. It paid out 17% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Scott Technology's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
View our latest analysis for Scott Technology
Click here to see how much of its profit Scott Technology paid out over the last 12 months.
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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Scott Technology's earnings per share have risen 11% per annum over the last five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Scott Technology has seen its dividend decline 0.5% per annum on average over the past 10 years, which is not great to see.
The Bottom Line
Has Scott Technology got what it takes to maintain its dividend payments? Scott Technology has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. Scott Technology looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
On that note, you'll want to research what risks Scott Technology is facing. Case in point: We've spotted 1 warning sign for Scott Technology you should be aware of.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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