Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see ADT Inc. (NYSE:ADT) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 17th of September, you won't be eligible to receive this dividend, when it is paid on the 2nd of October.
ADT's next dividend payment will be US$0.035 per share, on the back of last year when the company paid a total of US$0.14 to shareholders. Last year's total dividend payments show that ADT has a trailing yield of 1.3% on the current share price of $10.95. If you buy this business for its dividend, you should have an idea of whether ADT's dividend is reliable and sustainable. So we need to investigate whether ADT can afford its dividend, and if the dividend could grow.
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. ADT paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 23% of its free cash flow as dividends last year, which is conservatively low.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. ADT was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. ADT's dividend payments are broadly unchanged compared to where they were two years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.
Remember, you can always get a snapshot of ADT's financial health, by checking our visualisation of its financial health, here.
To Sum It Up
Has ADT got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of ADT.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with ADT. Our analysis shows 3 warning signs for ADT and you should be aware of these before buying any shares.
If you're in the market for dividend stocks, we recommend checking our list of top 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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