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Don't Race Out To Buy Spheria Emerging Companies Limited (ASX:SEC) Just Because It's Going Ex-Dividend

Simply Wall St

Readers hoping to buy Spheria Emerging Companies Limited (ASX:SEC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 5th of September in order to receive the dividend, which the company will pay on the 20th of September.

Spheria Emerging Companies's next dividend payment will be AU$0.04 per share. Last year, in total, the company distributed AU$0.08 to shareholders. Looking at the last 12 months of distributions, Spheria Emerging Companies has a trailing yield of approximately 4.8% on its current stock price of A$1.65. 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 investigate whether Spheria Emerging Companies can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Spheria Emerging Companies

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. Spheria Emerging Companies distributed an unsustainably high 123% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.

Click here to see how much of its profit Spheria Emerging Companies paid out over the last 12 months.

ASX:SEC Historical Dividend Yield, August 31st 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. From this perspective, we're disturbed to see earnings per share plunged 24% over the last 12 months, and we'd wonder if the company has had some kind of major event that has skewed the calculation.

We'd also point out that Spheria Emerging Companies issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Given that Spheria Emerging Companies has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Final Takeaway

Is Spheria Emerging Companies worth buying for its dividend? Not only are earnings per share shrinking, but Spheria Emerging Companies is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

Want to learn more about Spheria Emerging Companies? Here's a visualisation of its historical rate of revenue and earnings growth.

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.

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.