Yahoo Finance Should You Buy Waterco Limited (ASX:WAT) For Its Upcoming Dividend?
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 Waterco Limited (ASX:WAT) is about to go ex-dividend in just four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Waterco's shares on or after the 9th of November, you won't be eligible to receive the dividend, when it is paid on the 15th of December.
The company's next dividend payment will be AU$0.04 per share, on the back of last year when the company paid a total of AU$0.08 to shareholders. Last year's total dividend payments show that Waterco has a trailing yield of 2.3% on the current share price of A$3.41. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Check out our latest analysis for Waterco
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Waterco paid out just 20% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Waterco generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (88%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
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 how much of its profit Waterco paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Waterco has grown its earnings rapidly, up 36% a year for the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Waterco has seen its dividend decline 1.2% per annum on average over the past 10 years, which is not great to see.
The Bottom Line
From a dividend perspective, should investors buy or avoid Waterco? Earnings per share have grown at a nice rate in recent times and over the last year, Waterco paid out less than half its earnings and a bit over half its free cash flow. Waterco looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Waterco for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 2 warning signs for Waterco you should know about.
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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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