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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Anglo American plc (LON:AAL) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 15th of August will not receive this dividend, which will be paid on the 20th of September.
Anglo American's upcoming dividend is US$0.62 a share, following on from the last 12 months, when the company distributed a total of US$1.00 per share to shareholders. Based on the last year's worth of payments, Anglo American stock has a trailing yield of around 4.5% on the current share price of £18.424. If you buy this business for its dividend, you should have an idea of whether Anglo American's dividend is reliable and sustainable. So we need to investigate whether Anglo American can afford its dividend, and if the dividend could grow.
View our latest analysis for Anglo American
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Anglo American paid out a comfortable 35% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It distributed 40% of its free cash flow as dividends, a comfortable payout level for most companies.
It's positive to see that Anglo American's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Anglo American's earnings have been skyrocketing, up 57% per annum for the past five years. Anglo American is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.