Here's Why We're Wary Of Buying Johnson Matthey's (LON:JMAT) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Johnson Matthey Plc (LON:JMAT) is about to go ex-dividend in just four 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 important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Johnson Matthey's shares before the 17th of August in order to receive the dividend, which the company will pay on the 28th of August.

The company's next dividend payment will be UK£4.765 per share, and in the last 12 months, the company paid a total of UK£0.77 per share. Based on the last year's worth of payments, Johnson Matthey has a trailing yield of 3.5% on the current stock price of UK£21.84. 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 Johnson Matthey has been able to grow its dividends, or if the dividend might be cut.

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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. Johnson Matthey reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out more than half (57%) of its free cash flow in the past year, which is within an average range for most companies.

Check out our latest analysis for Johnson Matthey

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. Johnson Matthey reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Johnson Matthey has lifted its dividend by approximately 0.7% a year on average.

We update our analysis on Johnson Matthey every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

From a dividend perspective, should investors buy or avoid Johnson Matthey? It's hard to get used to Johnson Matthey paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Johnson Matthey.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Johnson Matthey. For example, we've found 2 warning signs for Johnson Matthey that we recommend you consider before investing in the business.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.