Today we'll take a closer look at 1300SMILES Limited (ASX:ONT) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
A high yield and a long history of paying dividends is an appealing combination for 1300SMILES. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying 1300SMILES for its dividend, and we'll go through these below.
Click the interactive chart for our full dividend analysis
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. In the last year, 1300SMILES paid out 74% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. 1300SMILES paid out 132% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Paying out more than 100% of your free cash flow in dividends is generally not a long-term, sustainable state of affairs, so we think shareholders should watch this metric closely.
We update our data on 1300SMILES every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of 1300SMILES's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was AU$0.12 in 2009, compared to AU$0.25 last year. Dividends per share have grown at approximately 7.6% per year over this time. The dividends haven't grown at precisely 7.6% every year, but this is a useful way to average out the historical rate of growth.