U.S. Markets closed

Here's Why We're Wary Of Buying Camellia Plc's (LON:CAM) For Its Upcoming Dividend

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Camellia Plc (LON:CAM) is about to go ex-dividend in just 3 days. You can purchase shares before the 29th of August in order to receive the dividend, which the company will pay on the 27th of September.

Camellia's next dividend payment will be UK£0.42 per share. Last year, in total, the company distributed UK£1.42 to shareholders. Last year's total dividend payments show that Camellia has a trailing yield of 1.4% on the current share price of £98.75. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Camellia can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Camellia

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Camellia paid out just 15% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow.

It's positive to see that Camellia's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

AIM:CAM Historical Dividend Yield, August 25th 2019

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Camellia's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Camellia has delivered 4.4% dividend growth per year on average over the past 10 years.

The Bottom Line

Is Camellia an attractive dividend stock, or better left on the shelf? It's disappointing to see earnings per share have fallen slightly, even though Camellia is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Curious about whether Camellia has been able to consistently generate growth? Here's a chart of its historical revenue and earnings growth.

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.