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Here's Why We're Wary Of Buying SEEK Limited's (ASX:SEK) For Its Upcoming Dividend

Simply Wall St
·4 mins read

SEEK Limited (ASX:SEK) stock is about to trade ex-dividend in 4 days time. You will need to purchase shares before the 25th of March to receive the dividend, which will be paid on the 9th of April.

SEEK's upcoming dividend is AU$0.13 a share, following on from the last 12 months, when the company distributed a total of AU$0.46 per share to shareholders. Based on the last year's worth of payments, SEEK has a trailing yield of 3.2% on the current stock price of A$14.52. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for SEEK

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. It paid out 79% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. 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 paid out more than half (64%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

ASX:SEK Historical Dividend Yield, March 20th 2020
ASX:SEK Historical Dividend Yield, March 20th 2020

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see SEEK's earnings per share have been shrinking at 2.4% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, SEEK has lifted its dividend by approximately 17% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. SEEK is already paying out 79% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Has SEEK got what it takes to maintain its dividend payments? While earnings per share are shrinking, it's encouraging to see that at least SEEK's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: SEEK has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering SEEK as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for SEEK and you should be aware of them before buying any shares.

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.