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It Might Not Be A Great Idea To Buy Senior plc (LON:SNR) For Its Next Dividend

Simply Wall St

It looks like Senior plc (LON:SNR) is about to go ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 31st of October will not receive this dividend, which will be paid on the 29th of November.

Senior's upcoming dividend is UK£0.02 a share, following on from the last 12 months, when the company distributed a total of UK£0.08 per share to shareholders. Based on the last year's worth of payments, Senior stock has a trailing yield of around 4.1% on the current share price of £1.852. 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 Senior can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Senior

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. Senior paid out 69% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Senior generated enough free cash flow to afford its dividend. Senior paid out more free cash flow than it generated - 129%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

While Senior'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. Were this to happen repeatedly, this would be a risk to Senior's ability to maintain its dividend.

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

LSE:SNR Historical Dividend Yield, October 27th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Senior's earnings per share have dropped 8.7% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, ten years ago, Senior has lifted its dividend by approximately 11% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

Is Senior an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. It's not that we think Senior is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Ever wonder what the future holds for Senior? 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.

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.