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Don't Race Out To Buy Supply Network Limited (ASX:SNL) Just Because It's Going Ex-Dividend

Simply Wall St

It looks like Supply Network Limited (ASX:SNL) is about to go ex-dividend in the next 4 days. If you purchase the stock on or after the 18th of March, you won't be eligible to receive this dividend, when it is paid on the 2nd of April.

Supply Network's next dividend payment will be AU$0.065 per share, on the back of last year when the company paid a total of AU$0.14 to shareholders. Based on the last year's worth of payments, Supply Network has a trailing yield of 4.1% on the current stock price of A$3.5. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Supply Network

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Supply Network paid out 68% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the past year it paid out 181% 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.

Supply Network paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Supply Network 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:SNL Historical Dividend Yield, March 13th 2020

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Supply Network, with earnings per share up 4.6% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Supply Network has delivered an average of 17% per year annual increase in its dividend, based on the past ten years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Is Supply Network an attractive dividend stock, or better left on the shelf? Earnings per share have grown somewhat, although Supply Network paid out over half its profits and the dividend was not well covered by free cash flow. It's not that we think Supply Network is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Supply Network. For example - Supply Network has 2 warning signs we think you should be aware of.

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.

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.

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. Thank you for reading.