It looks like Smith & Nephew plc (LON: SN.) Is set to be ex-dividend within the next three days. The ex-dividend date is one working day before the registration date, which is the deadline by which shareholders must be present on the books of the company to be eligible for the payment of a dividend. The ex-dividend date is important because any share transaction must have been settled before the registration date to be eligible for a dividend. This means that investors who buy Smith & Nephew shares on or after September 30 will not receive the dividend, which will be paid on October 27.

The company’s next dividend will be US $ 0.14 per share. Last year, in total, the company distributed US $ 0.38 to shareholders. Last year’s total dividend payouts show Smith & Nephew has a sliding 2.1% return on the current share price of £ 13.325. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. Accordingly, readers should always check whether Smith & Nephew has been able to increase its dividends or if the dividend could be reduced.

Check out our latest analysis for Smith & Nephew

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. Smith & Nephew paid out over half (60%) of its profits last year, which is a steady payout ratio for 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. It distributed 41% of its free cash flow in the form of dividends, a comfortable level of distribution for most companies.

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?

Stocks of companies that generate sustainable earnings growth often offer the best dividend prospects because it’s easier to raise the dividend when earnings rise. If profits fall enough, the company could be forced to cut its dividend. That’s why it’s a relief to see Smith & Nephew’s earnings per share grow 6.5% per year over the past five years. Decent historic growth in earnings per share suggests that Smith & Nephew has indeed increased shareholder value. However, he now pays more than half of his profits as dividends. 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. Since our data began 10 years ago, Smith & Nephew has increased its dividend by around 9.0% per year on average. We are happy to see dividends increasing alongside earnings over multiple years, which may be a sign that the company intends to share the growth with its shareholders.

The bottom line

Does Smith & Nephew have what it takes to maintain its dividend payments? While earnings per share growth has been modest, Smith & Nephew’s dividend payouts are around mid-range; 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. Overall, we are not extremely bearish on the stock, but there are probably better dividend investments.

In light of this, while Smith & Nephew has an attractive dividend, it is worth knowing the risks involved in this stock. Concrete example: we have spotted 2 warning signs for Smith & Nephew you must be aware.

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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 the mentioned stocks.
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