Rentokil Initial plc (LON:RTO) has passed our checks and is set to pay a UK dividend of £0.043

Rentokil Initial plc (LON:RTO) the stock is set to trade ex-dividend in 3 days. The ex-dividend date is one business day before the record date, which is the latest date by which shareholders must be present on the books of the company to be eligible for payment of a dividend. The ex-dividend date is important because each time a stock is bought or sold, the transaction takes at least two business days to settle. In other words, investors can buy Rentokil Initial shares before April 7 in order to be eligible for the dividend, which will be paid out on May 18.

The company’s next dividend payout will be £0.043 per share, on the back of last year when the company paid a total of £0.086 to shareholders. Based on last year’s payouts, Rentokil Initial has a yield of 1.7% on the current share price of £5.21. We love to see companies pay out a dividend, but it’s also important to make sure that laying the golden eggs doesn’t kill our golden hen! We need to see if the dividend is covered by earnings and if it increases.

Check out our latest review for Rentokil Initial

Dividends are usually paid out of company earnings, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. Fortunately, Rentokil Initial’s payout rate is modest at just 45% of profits. Still, cash flow is even more important than earnings in evaluating a dividend, so we need to see if the company has generated enough cash to pay its distribution. Fortunately, its dividend payouts only accounted for 34% of the free cash flow it generated, which is a comfortable payout ratio.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.

LSE:RTO Historic dividend April 3, 2022

Have earnings and dividends increased?

Companies with consistently rising earnings per share tend to create the best dividend-paying stocks because they generally find it easier to increase dividends per share. If earnings fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. That’s why it’s a relief to see that Rentokil Initial’s earnings per share have grown by 9.1% annually over the past five years. Management reinvested more than half of the company’s profits back into the business, and the company was able to increase its profits with this retained capital. We believe this is generally an attractive combination, as dividends can increase through a combination of earnings growth and/or a higher payout ratio over time.

Another key way to gauge a company’s dividend outlook is to measure its historical rate of dividend growth. Over the past 10 years, Rentokil Initial has increased its dividend by around 16% per year on average. It’s encouraging to see the company increasing its dividends as earnings rise, suggesting at least some corporate interest in rewarding shareholders.

Last takeaway

Does Rentokil Initial have what it takes to maintain its dividend payouts? Earnings per share growth has picked up somewhat, and Rentokil Initial is paying out less than half of its earnings and cash flow as dividends. This is interesting for several reasons, as it suggests that management may be reinvesting heavily in the business, but it also offers the possibility of increasing the dividend over time. We’d rather see earnings grow faster, but the best long-term dividend-paying stocks typically combine significant earnings-per-share growth with a low payout ratio, and Rentokil Initial is halfway there. Rentokil Initial looks solid on this overall analysis, and we would definitely consider looking into it further.

In light of this, although Rentokil Initial has an attractive dividend, it is worth knowing the risks associated with this stock. Our analysis shows 1 warning sign for Rentokil Initial and you should be aware of this before buying stocks.

If you are looking for strong dividend payers, we recommend by consulting our selection of the best dividend-paying stocks.

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.

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