Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Sysco Company (NYSE: SYY) is set to be ex-dividend in just 4 days. The ex-dividend date occurs one day before the record date, which is the day on which shareholders must be on the books of the company 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. Therefore, if you buy Sysco shares on or after September 30, you will not be eligible to receive the dividend, when it is paid on October 22.

The company’s upcoming dividend is US $ 0.47 per share, continuing the past 12 months when the company has distributed a total of US $ 1.88 per share to shareholders. Based on the value of last year’s payouts, Sysco’s stock has a rolling return of around 2.3% on the current stock price of $ 80.48. If you are buying this company for its dividend, you should know if Sysco’s dividend is reliable and sustainable. So we need to determine whether Sysco can afford its dividend and whether the dividend could increase.

See our latest analysis for Sysco

Dividends are generally paid out of company profits. If a company pays more dividends than it made a profit, then the dividend could be unsustainable. Sysco paid 177% of profits over the past year, which in our opinion is generally not viable unless there are mitigating features such as exceptionally strong cash flow or a large cash balance. Yet cash flow is still more important than earnings in valuing a dividend, so we need to see if the company has generated enough cash to pay for its distribution. Dividends consumed 64% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organizations.

It is disappointing that the dividend was not covered by earnings, but cash is more important from a dividend sustainability perspective, and Sysco has fortunately generated enough cash to fund its dividend. If executives were to continue paying more dividends than the company declared profits, we would take this as a warning sign. Extraordinarily few companies are able to persistently pay out a dividend in excess of their profits.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

Have profits and dividends increased?

When profits fall, dividend companies become much more difficult to analyze and to safely own. If profits fall enough, the company could be forced to cut its dividend. Readers will then understand why we are concerned that Sysco’s earnings per share have fallen 9.2% per year over the past five years. Such a sudden drop casts doubt on the future sustainability of the dividend.

Another key way to measure a company’s dividend outlook is to measure its historical rate of dividend growth. Since our data began 10 years ago, Sysco has increased its dividend by around 6.1% per year on average. It’s intriguing, but the combination of growing dividends despite falling profits can usually only be achieved by paying a higher percentage of the profits. Sysco is already paying 177% of its profits, and with declining profits, we think this dividend is unlikely to grow quickly in the future.

Last takeaways

Is Sysco an attractive dividend-paying stock, or rather left on the shelf? Earnings per share have been declining lately. Worse yet, Sysco pays the majority of its profits and more than half of its free cash flow. Positive cash flow is good news, but it’s not a good combination. It’s not the most attractive proposition from a dividend standpoint, and we would probably drop this one for now.

That said, if you look at this stock without worrying too much about the dividend, you should still be familiar with the risks involved with Sysco. To this end, you should inquire about the 2 warning signs we spotted with Sysco (including 1 which cannot be ignored).

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.

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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 any of the stocks mentioned.
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