U.S. Markets open in 1 hr 49 mins

Here's Why We're Wary Of Buying System1 Group PLC's (LON:SYS1) For Its Upcoming Dividend

Simply Wall St

It looks like System1 Group PLC (LON:SYS1) is about to go ex-dividend in the next 3 days. If you purchase the stock on or after the 14th of November, you won't be eligible to receive this dividend, when it is paid on the 13th of December.

System1 Group's next dividend payment will be UK£0.01 per share, and in the last 12 months, the company paid a total of UK£0.07 per share. Based on the last year's worth of payments, System1 Group stock has a trailing yield of around 3.8% on the current share price of £1.95. 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! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for System1 Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. System1 Group paid out 75% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution.

Click here to see how much of its profit System1 Group paid out over the last 12 months.

AIM:SYS1 Historical Dividend Yield, November 10th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see System1 Group's earnings per share have dropped 13% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, ten years ago, System1 Group has lifted its dividend by approximately 17% a year on average. 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.

To Sum It Up

Is System1 Group an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think System1 Group is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Keen to explore more data on System1 Group's financial performance? Check out our visualisation of its historical 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.