Do These 3 Checks Before Buying Samuel Heath & Sons plc (LON:HSM) For Its Upcoming Dividend
Samuel Heath & Sons plc (LON:HSM) is about to trade ex-dividend in the next 3 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Samuel Heath & Sons investors that purchase the stock on or after the 20th of August will not receive the dividend, which will be paid on the 28th of September.
The company's next dividend payment will be UK£0.085625 per share. Last year, in total, the company distributed UK£0.13 to shareholders. Based on the last year's worth of payments, Samuel Heath & Sons stock has a trailing yield of around 5.3% on the current share price of UK£2.45. 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 Samuel Heath & Sons 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. Samuel Heath & Sons distributed an unsustainably high 162% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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. Fortunately, it paid out only 35% of its free cash flow in the past year.
It's good to see that while Samuel Heath & Sons'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. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Check out our latest analysis for Samuel Heath & Sons
Click here to see how much of its profit Samuel Heath & Sons paid out over the last 12 months.
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. With that in mind, we're discomforted by Samuel Heath & Sons's 12% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Samuel Heath & Sons has delivered 0.5% dividend growth per year on average over the past 10 years.
Final Takeaway
Is Samuel Heath & Sons worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 162% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Samuel Heath & Sons's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Although, if you're still interested in Samuel Heath & Sons and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 6 warning signs for Samuel Heath & Sons (2 don't sit too well with us!) that deserve your attention before investing in the shares.
If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
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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.