Is It Smart To Buy Science Applications International Corporation (NASDAQ:SAIC) Before It Goes Ex-Dividend?

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Science Applications International Corporation (NASDAQ:SAIC) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least one business day to settle. Accordingly, Science Applications International investors that purchase the stock on or after the 9th of October will not receive the dividend, which will be paid on the 23rd of October.

The company's next dividend payment will be US$0.37 per share. Last year, in total, the company distributed US$1.48 to shareholders. Last year's total dividend payments show that Science Applications International has a trailing yield of 1.2% on the current share price of US$125.26. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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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. Science Applications International paid out just 17% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. A useful secondary check can be to evaluate whether Science Applications International generated enough free cash flow to afford its dividend. The good news is it paid out just 11% of its free cash flow in the last year.

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.

Check out our latest analysis for Science Applications International

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Science Applications International has grown its earnings rapidly, up 20% a year for the past five years. Science Applications International earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.'

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Science Applications International has delivered 1.8% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because Science Applications International is keeping back more of its profits to grow the business.

To Sum It Up

Should investors buy Science Applications International for the upcoming dividend? We love that Science Applications International is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Science Applications International for the dividends alone, you should always be mindful of the risks involved. For example, we've found 1 warning sign for Science Applications International that we recommend you consider before investing in the business.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.