Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sika AG (VTX:SIKA) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. 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 Sika's shares before the 27th of March in order to be eligible for the dividend, which will be paid on the 31st of March.
The company's next dividend payment will be CHF03.60 per share, on the back of last year when the company paid a total of CHF3.60 to shareholders. Looking at the last 12 months of distributions, Sika has a trailing yield of approximately 1.6% on its current stock price of CHF0225.60. If you buy this business for its dividend, you should have an idea of whether Sika's dividend is reliable and sustainable. So we need to investigate whether Sika can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Sika paid out a comfortable 46% of its profit last year. A useful secondary check can be to evaluate whether Sika generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 19% of its cash flow last year.
It's positive to see that Sika'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.
View our latest analysis for Sika
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Sika, with earnings per share up 7.9% on average over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.