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Do These 3 Checks Before Buying Highcroft Investments Plc (LON:HCFT) For Its Upcoming Dividend

Simply Wall St

Highcroft Investments Plc (LON:HCFT) stock is about to trade ex-dividend in 4 days time. Investors can purchase shares before the 12th of September in order to be eligible for this dividend, which will be paid on the 11th of October.

Highcroft Investments's next dividend payment will be UK£0.21 per share, and in the last 12 months, the company paid a total of UK£0.53 per share. Last year's total dividend payments show that Highcroft Investments has a trailing yield of 5.7% on the current share price of £9.2. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Highcroft Investments

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 80% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. That said, REITs are often required by law to distribute all of their earnings, and it's not unusual to see a REIT with a payout ratio around 100%. We wouldn't read too much into this. A useful secondary check can be to evaluate whether Highcroft Investments generated enough free cash flow to afford its dividend. It paid out 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's positive to see that Highcroft Investments'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 how much of its profit Highcroft Investments paid out over the last 12 months.

LSE:HCFT Historical Dividend Yield, September 7th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Highcroft Investments's earnings per share have fallen at approximately 8.2% a year over the previous 5 years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Highcroft Investments has lifted its dividend by approximately 11% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Highcroft Investments is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Should investors buy Highcroft Investments for the upcoming dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. It's not that we think Highcroft Investments is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Want to learn more about Highcroft Investments's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.