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Readers hoping to buy DCC plc (LON:DCC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order 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, DCC investors that purchase the stock on or after the 22nd of May will not receive the dividend, which will be paid on the 17th of July.
The company's next dividend payment will be UK£1.4021 per share. Last year, in total, the company distributed UK£2.06 to shareholders. Looking at the last 12 months of distributions, DCC has a trailing yield of approximately 4.3% on its current stock price of UK£48.08. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether DCC can afford its dividend, and if the dividend could grow.
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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. Last year DCC paid out 98% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether DCC generated enough free cash flow to afford its dividend. Dividends consumed 54% 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 DCC's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Check out our latest analysis for DCC
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that DCC's earnings are down 3.4% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. DCC has delivered an average of 10% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. DCC is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.