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Don't Buy Insurance Australia Group Limited (ASX:IAG) For Its Next Dividend Without Doing These Checks

Simply Wall St

Insurance Australia Group Limited (ASX:IAG) stock is about to trade ex-dividend in 2 days time. Investors can purchase shares before the 19th of August in order to be eligible for this dividend, which will be paid on the 30th of September.

Insurance Australia Group's next dividend payment will be AU$0.20 per share, and in the last 12 months, the company paid a total of AU$0.32 per share. Looking at the last 12 months of distributions, Insurance Australia Group has a trailing yield of approximately 4.1% on its current stock price of A$7.84. If you buy this business for its dividend, you should have an idea of whether Insurance Australia Group's dividend is reliable and sustainable. So we need to investigate whether Insurance Australia Group can afford its dividend, and if the dividend could grow.

View our latest analysis for Insurance Australia Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 85% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be worried about the risk of a drop in earnings.

When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.

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

ASX:IAG Historical Dividend Yield, August 16th 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. Readers will understand then, why we're concerned to see Insurance Australia Group's earnings per share have dropped 8.2% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

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, Insurance Australia Group has lifted its dividend by approximately 3.3% 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. Insurance Australia Group is already paying out 85% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid Insurance Australia Group? We're not overly enthused to see Insurance Australia Group's earnings in retreat at the same time as the company is paying out more than half of its earnings as dividends to shareholders. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

Ever wonder what the future holds for Insurance Australia Group? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.