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

Simply Wall St

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 DFS Furniture plc (LON:DFS) is about to go ex-dividend in just 3 days. You can purchase shares before the 5th of December in order to receive the dividend, which the company will pay on the 27th of December.

DFS Furniture's next dividend payment will be UK£0.075 per share. Last year, in total, the company distributed UK£0.11 to shareholders. Looking at the last 12 months of distributions, DFS Furniture has a trailing yield of approximately 4.7% on its current stock price of £2.36. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for DFS Furniture

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. DFS Furniture distributed an unsustainably high 131% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. DFS Furniture paid out more free cash flow than it generated - 131%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given DFS Furniture's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

LSE:DFS Historical Dividend Yield, December 1st 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. It's encouraging to see DFS Furniture has grown its earnings rapidly, up 35% a year for the past five years. Earnings per share have been growing rapidly, but the company is paying out a dividend that looks unsustainably high. Generally, when a company is paying out more than it earned as dividends, it could signal either that the company is spending heavily to fund its growth, or that earnings growth is likely to slow due to lack of reinvestment.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. DFS Furniture has delivered an average of 13% per year annual increase in its dividend, based on the past five years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is DFS Furniture worth buying for its dividend? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Curious what other investors think of DFS Furniture? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.