G4S plc (LON:GFS) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 5th of September in order to be eligible for this dividend, which will be paid on the 11th of October.
G4S's upcoming dividend is UK£0.036 a share, following on from the last 12 months, when the company distributed a total of UK£0.097 per share to shareholders. Looking at the last 12 months of distributions, G4S has a trailing yield of approximately 5.6% on its current stock price of £1.739. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether G4S can afford its dividend, and if the dividend could grow.
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. G4S paid out a disturbingly high 395% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 57% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.
It's good to see that while G4S's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see G4S's earnings have been skyrocketing, up 30% per annum for the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. G4S has delivered an average of 4.2% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
The Bottom Line
Is G4S worth buying for its dividend? Growing earnings per share and a normal cashflow payout ratio is an ok combination, but we're concerned that the company is paying out such a high percentage of its income as dividends. In summary, it's hard to get excited about G4S from a dividend perspective.
Ever wonder what the future holds for G4S? See what the 12 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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