Don't Buy Renishaw plc (LON:RSW) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Renishaw plc (LON:RSW) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Renishaw's shares before the 29th of October in order to receive the dividend, which the company will pay on the 3rd of December.

The company's upcoming dividend is UK£1.352 a share, following on from the last 12 months, when the company distributed a total of UK£0.82 per share to shareholders. Calculating the last year's worth of payments shows that Renishaw has a trailing yield of 1.6% on the current share price of UK£51.60. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Renishaw paid out more than half (50%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 91% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Renishaw 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 Renishaw's ability to maintain its dividend.

See our latest analysis for Renishaw

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Renishaw's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

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, Renishaw has lifted its dividend by approximately 5.5% a year on average.

Final Takeaway

Has Renishaw got what it takes to maintain its dividend payments? In addition to earnings being flat, Renishaw is paying out a reasonable percentage of its earnings as profits. However, the dividend was not well covered by free cash flow. It's not that we think Renishaw is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for Renishaw? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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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