Yahoo Finance Here's Why We're Wary Of Buying Smith & Nephew's (LON:SN.) 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 Smith & Nephew plc (LON:SN.) is about to go ex-dividend in just 3 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Meaning, you will need to purchase Smith & Nephew's shares before the 30th of March to receive the dividend, which will be paid on the 17th of May.
The company's upcoming dividend is US$0.23 a share, following on from the last 12 months, when the company distributed a total of US$0.38 per share to shareholders. Looking at the last 12 months of distributions, Smith & Nephew has a trailing yield of approximately 2.7% on its current stock price of £11.33. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
View our latest analysis for Smith & Nephew
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. Smith & Nephew distributed an unsustainably high 147% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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 an unsustainably high 297% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Smith & Nephew is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
Cash is slightly more important than profit from a dividend perspective, but given Smith & Nephew's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Smith & Nephew's earnings per share have fallen at approximately 22% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Smith & Nephew has increased its dividend at approximately 3.7% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Smith & Nephew is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
To Sum It Up
Is Smith & Nephew an attractive dividend stock, or better left on the shelf? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (147%) and cash flow as dividends. Unless there are grounds to believe a turnaround is imminent, this is one of the least attractive dividend stocks under this analysis. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Smith & Nephew.
With that in mind though, if the poor dividend characteristics of Smith & Nephew don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 5 warning signs for Smith & Nephew that we strongly recommend you have a look at before investing in the company.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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