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It Might Be Better To Avoid Boral Limited's (ASX:BLD) Upcoming Dividend

Simply Wall St

Readers hoping to buy Boral Limited (ASX:BLD) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 13th of March in order to receive the dividend, which the company will pay on the 15th of April.

Boral's next dividend payment will be AU$0.095 per share, on the back of last year when the company paid a total of AU$0.23 to shareholders. Based on the last year's worth of payments, Boral stock has a trailing yield of around 5.5% on the current share price of A$4.18. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Boral

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Boral paid out 159% 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. It paid out 109% of its free cash flow in the form of dividends last year, which is outside the comfort zone 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.

As Boral's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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

ASX:BLD Historical Dividend Yield, March 8th 2020

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Boral's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings are not growing much and Boral paid out a lot more than it earned in profit last year. This makes the dividend look potentially unsustainable in the long run.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Boral has delivered 7.7% dividend growth per year on average over the past ten years.

The Bottom Line

Is Boral an attractive dividend stock, or better left on the shelf? Earnings per share are effectively flat, plus Boral's dividend is not well covered by either earnings or cash flow, which is not great. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Boral don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 3 warning signs for Boral you should be aware of.

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.

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.