Spirax-Sarco Engineering plc (LON:SPX) stock is about to trade ex-dividend in 2 days time. Investors can purchase shares before the 23rd of April in order to be eligible for this dividend, which will be paid on the 22nd of May.
Spirax-Sarco Engineering's upcoming dividend is UK£0.78 a share, following on from the last 12 months, when the company distributed a total of UK£1.10 per share to shareholders. Based on the last year's worth of payments, Spirax-Sarco Engineering stock has a trailing yield of around 1.2% on the current share price of £88.22. If you buy this business for its dividend, you should have an idea of whether Spirax-Sarco Engineering's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Spirax-Sarco Engineering's payout ratio is modest, at just 49% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 46% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Spirax-Sarco Engineering'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.
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. Fortunately for readers, Spirax-Sarco Engineering's earnings per share have been growing at 10% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, Spirax-Sarco Engineering has increased its dividend at approximately 12% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Is Spirax-Sarco Engineering an attractive dividend stock, or better left on the shelf? Spirax-Sarco Engineering has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. There's a lot to like about Spirax-Sarco Engineering, and we would prioritise taking a closer look at it.
In light of that, while Spirax-Sarco Engineering has an appealing dividend, it's worth knowing the risks involved with this stock. Case in point: We've spotted 2 warning signs for Spirax-Sarco Engineering you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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