U.S. Markets close in 47 mins

It Might Not Be A Great Idea To Buy Shaver Shop Group Limited (ASX:SSG) For Its Next Dividend

Simply Wall St

It looks like Shaver Shop Group Limited (ASX:SSG) is about to go ex-dividend in the next 4 days. You will need to purchase shares before the 8th of October to receive the dividend, which will be paid on the 23rd of October.

Shaver Shop Group's next dividend payment will be AU$0.03 per share, and in the last 12 months, the company paid a total of AU$0.04 per share. Based on the last year's worth of payments, Shaver Shop Group has a trailing yield of 7.4% on the current stock price of A$0.61. If you buy this business for its dividend, you should have an idea of whether Shaver Shop Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Shaver Shop Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Its dividend payout ratio is 82% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be worried about the risk of a drop in earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (75%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

ASX:SSG Historical Dividend Yield, October 3rd 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. Shaver Shop Group's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 31% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past three years, Shaver Shop Group has increased its dividend at approximately 12% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Shaver Shop Group is already paying out 82% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Shaver Shop Group worth buying for its dividend? While earnings per share are shrinking, it's encouraging to see that at least Shaver Shop Group's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Shaver Shop Group.

Wondering what the future holds for Shaver Shop Group? See what the two 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.