The Star Entertainment Group Limited (ASX:SGR) is about to trade ex-dividend in the next 2 days. Ex-dividend means that investors that purchase the stock on or after the 21st of August will not receive this dividend, which will be paid on the 26th of September.
Star Entertainment Group's next dividend payment will be AU$0.10 per share. Last year, in total, the company distributed AU$0.23 to shareholders. Looking at the last 12 months of distributions, Star Entertainment Group has a trailing yield of approximately 5.4% on its current stock price of A$3.79. 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 Star Entertainment Group can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 79% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth It could become a concern if earnings started to decline. 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. It paid out an unsustainably high 280% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Star Entertainment Group is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.
While Star Entertainment Group's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Star Entertainment Group to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. 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's why it's comforting to see Star Entertainment Group's earnings have been skyrocketing, up 24% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
We'd also point out that Star Entertainment Group issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 7 years ago, Star Entertainment Group has lifted its dividend by approximately 14% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Is Star Entertainment Group worth buying for its dividend? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note Star Entertainment Group paid out a much higher percentage of its free cash flow, which makes us uncomfortable. To summarise, Star Entertainment Group looks okay on this analysis, although it doesn't appear a stand-out opportunity.
Wondering what the future holds for Star Entertainment Group? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at email@example.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.