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It Might Be Better To Avoid Bega Cheese Limited's (ASX:BGA) Upcoming 1.4% 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 Bega Cheese Limited (ASX:BGA) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 9th of September in order to be eligible for this dividend, which will be paid on the 1st of October.

Bega Cheese's next dividend payment will be AU$0.055 per share, and in the last 12 months, the company paid a total of AU$0.11 per share. Based on the last year's worth of payments, Bega Cheese has a trailing yield of 2.8% on the current stock price of A$4. 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! So we need to investigate whether Bega Cheese can afford its dividend, and if the dividend could grow.

View our latest analysis for Bega Cheese

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Bega Cheese distributed an unsustainably high 193% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 more than half (50%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Bega Cheese fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

ASX:BGA Historical Dividend Yield, September 4th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Bega Cheese's earnings per share have plummeted approximately 33% a year over the previous five years.

We'd also point out that Bega Cheese issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Bega Cheese has delivered an average of 7.9% per year annual increase in its dividend, based on the past 8 years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Bega Cheese is already paying out 193% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Bega Cheese worth buying for its dividend? Earnings per share have been shrinking in recent times. What's more, Bega Cheese is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

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

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.