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 Sodexo S.A. (EPA:SW) is about to go ex-dividend in just 3 days. You can purchase shares before the 30th of January in order to receive the dividend, which the company will pay on the 3rd of February.
Sodexo's next dividend payment will be €2.90 per share, on the back of last year when the company paid a total of €3.19 to shareholders. Calculating the last year's worth of payments shows that Sodexo has a trailing yield of 3.2% on the current share price of €98.3. If you buy this business for its dividend, you should have an idea of whether Sodexo's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
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. Sodexo is paying out an acceptable 64% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Sodexo generated enough free cash flow to afford its dividend. It distributed 44% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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 earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Sodexo, with earnings per share up 7.2% on average over the last five years. Decent historical earnings per share growth suggests Sodexo has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Sodexo has delivered 9.6% dividend growth per year on average over the past ten years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
The Bottom Line
Is Sodexo worth buying for its dividend? While earnings per share growth has been modest, Sodexo's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. To summarise, Sodexo looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Ever wonder what the future holds for Sodexo? See what the 17 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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