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Here's Why We're Wary Of Buying Tabcorp Holdings Limited's (ASX:TAH) For Its Upcoming Dividend

Simply Wall St

It looks like Tabcorp Holdings Limited (ASX:TAH) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 21st of August in order to be eligible for this dividend, which will be paid on the 20th of September.

Tabcorp Holdings's next dividend payment will be AU$0.11 per share, on the back of last year when the company paid a total of AU$0.22 to shareholders. Based on the last year's worth of payments, Tabcorp Holdings has a trailing yield of 5.0% on the current stock price of A$4.43. If you buy this business for its dividend, you should have an idea of whether Tabcorp Holdings's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Tabcorp Holdings

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. Tabcorp Holdings paid out 119% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. The company paid out 90% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given Tabcorp Holdings's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

ASX:TAH Historical Dividend Yield, August 16th 2019

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's not encouraging to see that Tabcorp Holdings's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Tabcorp Holdings's dividend payments per share have declined at 11% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

Is Tabcorp Holdings an attractive dividend stock, or better left on the shelf? Not only are earnings per share flat, but Tabcorp Holdings is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious what other investors think of Tabcorp Holdings? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

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.