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Don't Race Out To Buy Seven Group Holdings Limited (ASX:SVW) Just Because It's Going Ex-Dividend

Simply Wall St

Seven Group Holdings Limited (ASX:SVW) is about to trade ex-dividend in the next 4 days. You can purchase shares before the 13th of September in order to receive the dividend, which the company will pay on the 11th of October.

Seven Group Holdings's next dividend payment will be AU$0.21 per share, and in the last 12 months, the company paid a total of AU$0.42 per share. Calculating the last year's worth of payments shows that Seven Group Holdings has a trailing yield of 2.5% on the current share price of A$16.8. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Seven Group Holdings can afford its dividend, and if the dividend could grow.

View our latest analysis for Seven Group Holdings

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. Seven Group Holdings is paying out an acceptable 65% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Seven Group Holdings generated enough free cash flow to afford its dividend. Over the past year it paid out 116% of its free cash flow as dividends, which is uncomfortably 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.

While Seven Group Holdings'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. Cash is king, as they say, and were Seven Group Holdings to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

ASX:SVW Historical Dividend Yield, September 8th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Seven Group Holdings's earnings per share have been shrinking at 3.2% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Seven Group Holdings has delivered an average of 9.9% per year annual increase in its dividend, based on the past 9 years of dividend payments. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Final Takeaway

Is Seven Group Holdings worth buying for its dividend? Seven Group Holdings had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Ever wonder what the future holds for Seven Group Holdings? See what the five 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.