Don't Buy Link Administration Holdings Limited (ASX:LNK) For Its Next Dividend Without Doing These Checks
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Link Administration Holdings Limited (ASX:LNK) is about to go ex-dividend in just day or two. Investors can purchase shares before the 1st of September in order to be eligible for this dividend, which will be paid on the 25th of September.
Link Administration Holdings's upcoming dividend is AU$0.035 a share, following on from the last 12 months, when the company distributed a total of AU$0.10 per share to shareholders. Last year's total dividend payments show that Link Administration Holdings has a trailing yield of 2.4% on the current share price of A$4.1. If you buy this business for its dividend, you should have an idea of whether Link Administration Holdings's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.
View our latest analysis for Link Administration Holdings
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Link Administration Holdings reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Link Administration Holdings didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the past year it paid out 123% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Link Administration Holdings reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.
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, four years ago, Link Administration Holdings has lifted its dividend by approximately 5.7% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Link Administration Holdings is keeping back more of its profits to grow the business.
We update our analysis on Link Administration Holdings every 24 hours, so you can always get the latest insights on its financial health, here.
Final Takeaway
Has Link Administration Holdings got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow." With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Link Administration Holdings.
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 Link Administration Holdings. For example, we've found 2 warning signs for Link Administration Holdings (1 can't be ignored!) that deserve your attention before investing in the shares.
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.
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.
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