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Don't Buy Redcape Hotel Group (ASX:RDC) For Its Next Dividend Without Doing These Checks

Simply Wall St
·4 min read

It looks like Redcape Hotel Group (ASX:RDC) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 30th of December will not receive this dividend, which will be paid on the 26th of February.

The upcoming dividend for Redcape Hotel Group will put a total of AU$0.018 per share in shareholders' pockets, up from last year's total dividends of AU$0.012. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Redcape Hotel Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Redcape Hotel Group paid out a disturbingly high 232% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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. It paid out an unsustainably high 301% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how Redcape Hotel Group intends to continue funding this dividend, or if it could be forced to cut the payment.

As Redcape Hotel Group's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

historic-dividend
historic-dividend

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. While earnings per share are growing rapidly, the fact that the company is paying out more than twice its earnings as dividends is quite concerning. We'd suggest looking into this further before considering a purchase.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Redcape Hotel Group's dividend payments per share have declined at 27% per year on average over the past two years, which is uninspiring. Redcape Hotel Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

Final Takeaway

Should investors buy Redcape Hotel Group for the upcoming dividend? While it's nice to see earnings per share growing, we're curious about how Redcape Hotel Group intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of Redcape Hotel Group don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 3 warning signs we've spotted with Redcape Hotel Group (including 2 which are potentially serious).

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.