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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 Step One Clothing Limited (ASX:STP) is about to trade ex-dividend in the next 2 days. Typically, the ex-dividend date is one business day 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 takes at least two business day to settle. Meaning, you will need to purchase Step One Clothing's shares before the 24th of February to receive the dividend, which will be paid on the 14th of March.
The company's next dividend payment will be AU$0.044 per share, on the back of last year when the company paid a total of AU$0.068 to shareholders. Last year's total dividend payments show that Step One Clothing has a trailing yield of 6.5% on the current share price of AU$1.045. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Step One Clothing has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for Step One Clothing
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. Step One Clothing paid out a comfortable 39% of its profit last year. 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 92% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.
Step One Clothing paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Step One Clothing's ability to maintain its dividend.
Click here to see how much of its profit Step One Clothing paid out over the last 12 months.
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 fall far enough, the company could be forced to cut its dividend. It's encouraging to see Step One Clothing has grown its earnings rapidly, up 48% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.