Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Bodycote plc (LON:BOY) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible 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. In other words, investors can purchase Bodycote's shares before the 24th of April in order to be eligible for the dividend, which will be paid on the 5th of June.

The company's next dividend payment will be UK£0.161 per share, on the back of last year when the company paid a total of UK£0.23 to shareholders. Calculating the last year's worth of payments shows that Bodycote has a trailing yield of 4.8% on the current share price of UK£4.788. If you buy this business for its dividend, you should have an idea of whether Bodycote's dividend is reliable and sustainable. So we need to investigate whether Bodycote can afford its dividend, and if the dividend could grow.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. An unusually high payout ratio of 214% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Bodycote generated enough free cash flow to afford its dividend. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Bodycote's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

View our latest analysis for Bodycote

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.LSE:BOY Historic Dividend April 19th 2025

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Bodycote's earnings per share have dropped 26% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Story Continues

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Bodycote has seen its dividend decline 3.9% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

From a dividend perspective, should investors buy or avoid Bodycote? Earnings per share have been shrinking in recent times. Worse, Bodycote's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

With that in mind though, if the poor dividend characteristics of Bodycote don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 3 warning signs for Bodycote that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

View Comments