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Don't Buy Stride Stapled Group (NZSE:SPG) For Its Next Dividend Without Doing These Checks

Simply Wall St

It looks like Stride Stapled Group (NZSE:SPG) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 12th of September will not receive this dividend, which will be paid on the 20th of September.

Stride Stapled Group's upcoming dividend is NZ$0.034 a share, following on from the last 12 months, when the company distributed a total of NZ$0.099 per share to shareholders. Calculating the last year's worth of payments shows that Stride Stapled Group has a trailing yield of 4.2% on the current share price of NZ$2.37. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Stride Stapled Group

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. Last year Stride Stapled Group paid out 109% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. While Stride Stapled Group seems to be paying out a very high percentage of its income, REITs have different dividend payment behaviour and so, while we don't think this is great, we also don't think it is unusual. A useful secondary check can be to evaluate whether Stride Stapled Group generated enough free cash flow to afford its dividend. Stride Stapled Group paid out more free cash flow than it generated - 112%, 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 Stride Stapled Group'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.

NZSE:SPG Historical Dividend Yield, September 7th 2019

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Stride Stapled Group earnings per share are up 7.5% per annum over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Stride Stapled Group's dividend payments are effectively flat on where they were two years ago.

To Sum It Up

Is Stride Stapled Group worth buying for its dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Stride Stapled Group.

Curious what other investors think of Stride Stapled Group? See what analysts 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.