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It Might Be Better To Avoid GWA Group Limited's (ASX:GWA) Upcoming 3.0% Dividend

Simply Wall St

Readers hoping to buy GWA Group Limited (ASX:GWA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 26th of August will not receive the dividend, which will be paid on the 4th of September.

GWA Group's next dividend payment will be AU$0.095 per share, and in the last 12 months, the company paid a total of AU$0.18 per share. Based on the last year's worth of payments, GWA Group stock has a trailing yield of around 5.8% on the current share price of A$3.17. If you buy this business for its dividend, you should have an idea of whether GWA Group's dividend is reliable and sustainable. As a result, readers should always check whether GWA Group has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for GWA Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. GWA Group paid out 111% 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 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. The company paid out 95% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

As GWA Group'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:GWA Historical Dividend Yield, August 21st 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. Fortunately for readers, GWA Group's earnings per share have been growing at 10% a year for the past five years. It's not encouraging to see GWA Group paying out basically all of its earnings and cashflow to shareholders. We're glad that earnings are growing rapidly, but we're wary of the company stretching itself financially.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. GWA Group's dividend payments are broadly unchanged compared to where they were ten years ago.

To Sum It Up

Has GWA Group got what it takes to maintain its dividend payments? While it's nice to see earnings per share growing, we're curious about how GWA Group intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of GWA Group.

Curious what other investors think of GWA Group? 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.