Regular readers will know we love our dividends at Simply Wall St, which is why it’s exciting to see International Game Technology PLC (NYSE:IGT) is set to trade ex-dividend in the next three days. The ex-dividend date is usually one business day before the record date which is the latest date by which you must be present on the books of the company as a shareholder in order to receive the dividend. The ex-dividend date is important because any stock transaction must have settled before the record date to be eligible for a dividend. In other words, investors can buy shares of International Game Technology before May 23 in order to be eligible for the dividend, which will be paid on June 7.
The company’s next dividend payment will be $0.20 per share, and over the past 12 months the company has paid a total of $0.80 per share. Last year’s total dividend payout shows that International Game Technology has a 4.0% yield on the current stock price of $20.11. Dividends contribute greatly to investment returns for long-term holders, but only if the dividend continues to be paid. That’s why we always have to check if the dividend payouts seem sustainable and if the business is growing.
See our latest analysis for International Game Technology
Dividends are usually paid out of company profits. If a company pays out more dividends than it earns in profits, then the dividend could be unsustainable. International Game Technology distributed 126% of its profits as dividends to shareholders last year. Without extenuating circumstances, we consider that the dividend risks being reduced. Still, cash flow is usually more important than earnings in assessing the sustainability of dividends, so we always need to check whether the company has generated enough cash to pay its dividend. Fortunately, it only paid out 12% of its free cash flow last year.
It’s disappointing that the dividend wasn’t covered by earnings, but cash is more important from a dividend sustainability perspective, and International Game Technology has thankfully generated enough cash to fund its dividend. If executives were to continue paying out more dividends than the company reported earnings, we would consider that a warning sign. Extraordinarily few companies are able to consistently pay out a dividend that exceeds their earnings.
Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.
Have earnings and dividends increased?
Companies with declining profits are tricky from a dividend perspective. If business goes into a recession and the dividend is cut, the company could see its value drop precipitously. Readers will then understand why we are concerned that International Game Technology’s earnings per share have fallen 21% annually over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid out shrinks.
Most investors primarily gauge a company’s dividend prospects by checking the historical rate of dividend growth. It looks like International Game Technology’s dividends are largely the same as they were seven years ago. If a company’s dividend remains stable while profits are falling, it is usually a sign that it is paying out a higher percentage of its profits. This can become unsustainable if revenues drop enough.
Is International Game Technology worth buying for its dividend? It is not a good combination to see a company with declining profits and pay out 126% of its profits, which could imply that the dividend may be reduced in the future. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mismatch between revenue and cash flow. Conclusion: International Game Technology has some unfortunate characteristics that we believe could lead to sub-optimal results for dividend investors.
With that in mind, if you don’t mind International Game Technology’s low dividend characteristics, it’s worth being aware of the risks involved with this company. For example, International Game Technology has 3 warning signs (and 1 which is a little worrying) that we think you should know about.
As a general rule, we don’t recommend simply buying the first dividend-paying stock you see. Here is a curated list of attractive stocks that are strong dividend payers.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.