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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 PEC Ltd. (SGX:IX2) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day 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 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, PEC investors that purchase the stock on or after the 10th of November will not receive the dividend, which will be paid on the 24th of November.
The upcoming dividend for PEC will put a total of S$0.035 per share in shareholders' pockets, up from last year's total dividends of S$0.025. If you buy this business for its dividend, you should have an idea of whether PEC's dividend is reliable and sustainable. So we need to investigate whether PEC can afford its dividend, and if the dividend could grow.
View our latest analysis for PEC
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. That's why it's good to see PEC paying out a modest 45% of its 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 distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that PEC's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see how much of its profit PEC paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see PEC's earnings per share have been shrinking at 2.1% a year over the previous five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the PEC dividends are largely the same as they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.