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Don't Buy Caffyns plc (LON:CFYN) For Its Next Dividend Without Doing These Checks

Simply Wall St

Caffyns plc (LON:CFYN) stock is about to trade ex-dividend in 3 days time. Ex-dividend means that investors that purchase the stock on or after the 5th of December will not receive this dividend, which will be paid on the 6th of January.

Caffyns's upcoming dividend is UK£0.075 a share, following on from the last 12 months, when the company distributed a total of UK£0.23 per share to shareholders. Based on the last year's worth of payments, Caffyns stock has a trailing yield of around 6.0% on the current share price of £3.75. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Caffyns

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Caffyns paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Caffyns 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. Caffyns paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

Click here to see how much of its profit Caffyns paid out over the last 12 months.

LSE:CFYN Historical Dividend Yield, December 1st 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Caffyns reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Caffyns has increased its dividend at approximately 19% a year on average.

We update our analysis on Caffyns every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Should investors buy Caffyns for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Want to learn more about Caffyns? Here's a visualisation of its historical rate of 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.

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.

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. Thank you for reading.