Some investors rely on dividends to grow their wealth, and if you are one of those dividends, you may be intrigued to know that BAE Systems plc (LON: BA.) Will soon receive an ex-dividend in just 3 days. This means that investors who buy shares on April 22 or later will not receive a dividend, which will be paid on June 1.
The next dividend payment to BAE Systems will be £ 0.14 per share, and in the last 12 months the company has paid a total of £ 0.23 per share. A calculation of last year’s payment value shows that BAE Systems has a yield of 4.5% on the current share price of £ 5.22. Dividends are an important part of income for many shareholders, but company health is crucial to maintaining these dividends. We need to see if the dividend is covered by earnings and if it grows.
See our latest analysis for BAE systems
Dividends are usually paid out of the company’s profits, so if the company pays more than it earned, then its dividend is usually at greater risk of reduction. BAE Systems paid out more than half (58%) of earnings last year, which is a regular payout ratio for most companies. However, cash flow is usually more important than profit to assess the sustainability of dividends, so we should always check that the company has generated enough money to afford its dividend. The company has paid out 108% of its free cash flow over the past year, which we think is outside the ideal range for most businesses. Companies usually need money more than they need to make money – the costs don’t pay for themselves – so it’s not great to see them pay off so much of their cash flow.
Although BAE Systems ’dividends are covered by the company’s profits, cash is somewhat more important, so it’s not great to see that the company hasn’t generated enough money to pay out the dividend. Money is king, as they say, and BAE Systems has repeatedly paid dividends that are not well covered by cash flow, we would consider this a warning sign.
Click here to see the company’s payout ratio, plus analysts ’estimates of its future dividends.
Are earnings and dividends growing?
Shares in companies that generate sustainable earnings growth often have the best prospects for dividends, because the dividend is easier to raise when earnings grow. If earnings fall far enough, the company could be forced to reduce its dividend. With that in mind, we are encouraged by continued growth in BAE Systems, with earnings per share that have risen by an average of 7.0% over the past five years. Earnings are growing at a steady pace, but we are concerned that dividend payments have consumed most of the company’s cash flow over the past year.
The main way most investors will assess a company’s dividend prospects is by checking the historical dividend growth rate. Since the start of our data, 10 years ago, BAE Systems has raised its dividend by an average of approximately 3.1% per annum. It is encouraging to see the company raise dividends as earnings grow, suggesting at least some corporate interest in rewarding shareholders.
Finally to take away
Should investors buy BAE Systems for the upcoming dividend? BAE Systems pays a reasonable percentage of its revenue and an awkwardly high 108% of its cash flow as a dividend. At least earnings per share are constantly growing. As things take shape from a dividend perspective, we would be inclined to stay away from the BAE system.
If you say so, if you are watching this stock without much concern about the dividend, you should still be aware of the risks associated with BAE Systems. For example – BAE Systems has 1 warning sign we think you should be aware.
If you are trading dividend shares, we recommend that you check our list of major shares with a yield of more than 2% and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. Our goal is to bring you long-term focused analysis guided by fundamental data. Please note that our analysis may not take into account the latest company announcements or price-sensitive quality material. Wall St simply does not have a position in any of the mentioned stocks.
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