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Don't Buy Tate & Lyle plc (LON:TATE) For Its Next Dividend Without Doing These Checks

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Tate & Lyle plc (LON:TATE) is about to trade ex-dividend in the next 2 days. This means that investors who purchase shares on or after the 21st of November will not receive the dividend, which will be paid on the 3rd of January.

Tate & Lyle's next dividend payment will be UK£0.088 per share, and in the last 12 months, the company paid a total of UK£0.29 per share. Based on the last year's worth of payments, Tate & Lyle has a trailing yield of 4.1% on the current stock price of £7.132. If you buy this business for its dividend, you should have an idea of whether Tate & Lyle's dividend is reliable and sustainable. As a result, readers should always check whether Tate & Lyle has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Tate & Lyle

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. Tate & Lyle is paying out an acceptable 59% of its profit, a common payout level among most companies. 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 more than half (66%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Tate & Lyle'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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:TATE Historical Dividend Yield, November 18th 2019

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Tate & Lyle's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Tate & Lyle has increased its dividend at approximately 2.5% a year on average.

The Bottom Line

Has Tate & Lyle got what it takes to maintain its dividend payments? Tate & Lyle has been unable to generate earnings growth, but at least its dividend looks sustainable, with its profit and cashflow payout ratios within reasonable limits. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Tate & Lyle.

Wondering what the future holds for Tate & Lyle? See what the 11 analysts we track 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 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. Thank you for reading.