Allied Farmers Limited (NZSE:ALF) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 13th of December in order to receive the dividend, which the company will pay on the 17th of January.
Allied Farmers's next dividend payment will be NZ$0.02 per share. Last year, in total, the company distributed NZ$0.02 to shareholders. Based on the last year's worth of payments, Allied Farmers stock has a trailing yield of around 2.9% on the current share price of NZ$0.68. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
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. That's why it's good to see Allied Farmers paying out a modest 26% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The good news is it paid out just 12% of its free cash flow in the last year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
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. Allied Farmers's earnings per share have fallen at approximately 6.5% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
We'd also point out that Allied Farmers issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Allied Farmers's dividend payments are effectively flat on where they were two years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.
Should investors buy Allied Farmers for the upcoming dividend? Allied Farmers has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Want to learn more about Allied Farmers'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.
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