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Do These 3 Checks Before Buying H&E Equipment Services, Inc. (NASDAQ:HEES) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy H&E Equipment Services, Inc. (NASDAQ:HEES) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 29th of May to receive the dividend, which will be paid on the 12th of June.

H&E Equipment Services's upcoming dividend is US$0.28 a share, following on from the last 12 months, when the company distributed a total of US$1.10 per share to shareholders. Based on the last year's worth of payments, H&E Equipment Services stock has a trailing yield of around 7.3% on the current share price of $15.09. If you buy this business for its dividend, you should have an idea of whether H&E Equipment Services's dividend is reliable and sustainable. As a result, readers should always check whether H&E Equipment Services has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for H&E Equipment Services

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. Last year, H&E Equipment Services paid out 110% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Fortunately, it paid out only 34% of its free cash flow in the past year.

It's good to see that while H&E Equipment Services's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NasdaqGS:HEES Historical Dividend Yield May 24th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by H&E Equipment Services's 8.6% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, six years ago, H&E Equipment Services has lifted its dividend by approximately 1.6% a year on average.

The Bottom Line

Is H&E Equipment Services worth buying for its dividend? It's not a great combination to see a company with earnings in decline and paying out 110% of its profits, which could imply the dividend may be at risk of being cut 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 mis-match between income and cashflow. Bottom line: H&E Equipment Services has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with H&E Equipment Services. We've identified 5 warning signs with H&E Equipment Services (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.