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It Might Not Be A Great Idea To Buy Warpaint London PLC (LON:W7L) For Its Next 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 Warpaint London PLC (LON:W7L) is about to go ex-dividend in just 3 days. This means that investors who purchase shares on or after the 31st of October will not receive the dividend, which will be paid on the 15th of November.

Warpaint London's next dividend payment will be UK£0.01 per share, and in the last 12 months, the company paid a total of UK£0.04 per share. Calculating the last year's worth of payments shows that Warpaint London has a trailing yield of 5.5% on the current share price of £0.805. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Warpaint London

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Warpaint London distributed an unsustainably high 143% 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. Warpaint London paid out more free cash flow than it generated - 142%, 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.

As Warpaint London'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.

AIM:W7L Historical Dividend Yield, October 27th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Warpaint London's earnings per share have fallen at approximately 24% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Warpaint London has delivered an average of 71% per year annual increase in its dividend, based on the past two 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. Warpaint London is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Has Warpaint London got what it takes to maintain its dividend payments? Not only are earnings per share declining, but Warpaint London is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. Bottom line: Warpaint London has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Curious what other investors think of Warpaint London? 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.