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Don't Race Out To Buy A.P. Eagers Limited (ASX:APE) Just Because It's Going Ex-Dividend

Simply Wall St

A.P. Eagers Limited (ASX:APE) stock is about to trade ex-dividend in 4 days time. Ex-dividend means that investors that purchase the stock on or after the 25th of September will not receive this dividend, which will be paid on the 17th of October.

A.P. Eagers's upcoming dividend is AU$0.1 a share, following on from the last 12 months, when the company distributed a total of AU$0.4 per share to shareholders. Based on the last year's worth of payments, A.P. Eagers has a trailing yield of 2.7% on the current stock price of A$13.48. 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.

View our latest analysis for A.P. Eagers

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. Its dividend payout ratio is 77% 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 It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether A.P. Eagers generated enough free cash flow to afford its dividend. Over the past year it paid out 147% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While A.P. Eagers's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to A.P. Eagers's ability to maintain its dividend.

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

ASX:APE Historical Dividend Yield, September 20th 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see A.P. Eagers earnings per share are up 5.5% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, A.P. Eagers has increased its dividend at approximately 15% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Has A.P. Eagers got what it takes to maintain its dividend payments? A.P. Eagers is paying out a reasonable percentage of its income and an uncomfortably high 147% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not that we think A.P. Eagers is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Wondering what the future holds for A.P. Eagers? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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.