It looks like J Sainsbury plc (LON:SBRY) is about to go ex-dividend in the next 3 days. The ex-dividend date is two business days before a company’s record date in most cases, 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 can take two business days or more to settle. Therefore, if you purchase J Sainsbury’s shares on or after the 13th of November, you won’t be eligible to receive the dividend, when it is paid on the 19th of December.
The company’s next dividend payment will be UK£0.151 per share, on the back of last year when the company paid a total of UK£0.14 to shareholders. Last year’s total dividend payments show that J Sainsbury has a trailing yield of 3.9% on the current share price of UK£3.492. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s 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. Its dividend payout ratio is 75% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We’d be worried about the risk of a drop in earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 28% of its free cash flow in the past year.
It’s positive to see that J Sainsbury’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
View our latest analysis for J Sainsbury
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. That’s why it’s comforting to see J Sainsbury’s earnings have been skyrocketing, up 26% per annum for the past five years. Earnings per share are growing at a rapid rate, yet the company is paying out more than three-quarters of its earnings.