Is SDL plc (LON:SDL) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Investors might not know much about SDL's dividend prospects, even though it has been paying dividends for the last eight years and offers a 1.4% yield. While the yield may not look too great, the relatively long payment history is interesting. Some simple research can reduce the risk of buying SDL for its dividend - read on to learn more.
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Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, SDL paid out 37% of its profit as dividends. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. SDL paid out a conservative 43% of its free cash flow as dividends last year. 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.
Consider getting our latest analysis on SDL's financial position 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. The first recorded dividend for SDL, in the last decade, was eight years ago. It's good to see that SDL has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was UK£0.055 in 2011, compared to UK£0.07 last year. This works out to be a compound annual growth rate (CAGR) of approximately 3.1% a year over that time. SDL's dividend payments have fluctuated, so it hasn't grown 3.1% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.