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Why It Might Not Make Sense To Buy Spectris plc (LON:SXS) 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 Spectris plc (LON:SXS) is about to go ex-dividend in just 2 days. If you purchase the stock on or after the 10th of October, you won't be eligible to receive this dividend, when it is paid on the 8th of November.

Spectris's upcoming dividend is UK£0.2 a share, following on from the last 12 months, when the company distributed a total of UK£0.6 per share to shareholders. Based on the last year's worth of payments, Spectris stock has a trailing yield of around 2.6% on the current share price of £23.81. If you buy this business for its dividend, you should have an idea of whether Spectris's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Spectris

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Spectris distributed an unsustainably high 151% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 73% 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 Spectris's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

LSE:SXS Historical Dividend Yield, October 7th 2019
LSE:SXS Historical Dividend Yield, October 7th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. Spectris's earnings per share have fallen at approximately 25% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Spectris has lifted its dividend by approximately 10% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Spectris is already paying out 151% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Spectris worth buying for its dividend? Earnings per share have been shrinking in recent times. Additionally, Spectris is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not that we think Spectris is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Curious what other investors think of Spectris? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

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.