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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Smith & Nephew plc (LON:SN.) is about to trade ex-dividend in the next 3 days. The ex-dividend date is commonly two business days before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. In other words, investors can purchase Smith & Nephew's shares before the 27th of March in order to be eligible for the dividend, which will be paid on the 28th of May.
The company's next dividend payment will be US$0.231 per share, and in the last 12 months, the company paid a total of US$0.38 per share. Calculating the last year's worth of payments shows that Smith & Nephew has a trailing yield of 2.7% on the current share price of UK£10.85. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Smith & Nephew can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 79% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (54%) of its free cash flow in the past year, which is within an average range 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.
See our latest analysis for Smith & Nephew
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Smith & Nephew's earnings per share have dropped 7.2% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.