Readers wishing to buy Atlas Copco AB (STO: ATCO A) for its dividend will have to make its move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is a business day before a company’s registration date, which is the date the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because every time a stock is bought or sold, the transaction takes at least two business days to settle. This means that investors who buy Atlas Copco shares on or after October 22 will not receive the dividend, which will be paid on October 28.
The company’s upcoming dividend is Kroner 3.65 per share, following on from the past 12 months when the company has distributed a total of Kroner 7.30 per share to shareholders. Last year’s total dividend payments show Atlas Copco has a rolling 1.3% return on the current share price of SEK 556. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. So we need to determine whether Atlas Copco can afford its dividend and whether the dividend could increase.
See our latest review for Atlas Copco
Dividends are usually paid out of the company’s profits, so if a company pays more than it earned, its dividend is usually at risk of being reduced. Atlas Copco pays an acceptable level of 54% of its profits, a payment level common to most companies. Yet cash flow is usually more important than earnings in assessing dividend sustainability, so we always need to check whether the company has generated enough cash to pay its dividend. Fortunately, its dividend payments only took 43% of the free cash flow it generated, which is a comfortable payout ratio.
It is encouraging to see that the dividend is covered by both earnings and cash flow. This usually suggests that the dividend is sustainable, as long as profits don’t drop sharply.
Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.
Have profits and dividends increased?
Companies with consistently rising earnings per share usually make the best dividend-paying stocks because they generally find it easier to raise dividends per share. If profits fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. That’s why it’s a relief to see Atlas Copco’s earnings per share up 7.0% per year over the past five years. While profits have grown at a credible rate, the company is paying the majority of its profits to its shareholders. It is therefore unlikely that the company will be able to reinvest heavily in its business, which could portend slower growth in the future.
Another key way to measure a company’s dividend outlook is to measure its historical rate of dividend growth. Over the past 10 years, Atlas Copco has increased its dividend to around 6.2% per year on average. It is encouraging to see the company raising its dividends as profits rise, suggesting at least some corporate interest in rewarding shareholders.
Should investors buy Atlas Copco for the next dividend? While earnings per share growth has been modest, Atlas Copco’s dividend payouts hover around an average level; without a sharp change in earnings, we think the dividend is probably quite sustainable. Fortunately, the company paid a conservatively small percentage of its free cash flow. In summary, it’s hard to get excited about Atlas Copco from a dividend perspective.
In light of this, while Atlas Copco has an attractive dividend, it is worth knowing the risks associated with this stock. Every business has risks, and we have spotted 1 warning sign for Atlas Copco you should know.
A common investment mistake is to buy the first interesting stock you see. Here you will find a list of promising dividend paying stocks with a yield above 2% and an upcoming dividend.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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