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Read This Before Considering Chemring Group PLC (LON:CHG) For Its Upcoming 0.6% 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 Chemring Group PLC (LON:CHG) is about to go ex-dividend in just 3 days. If you purchase the stock on or after the 29th of August, you won't be eligible to receive this dividend, when it is paid on the 13th of September.

Chemring Group's next dividend payment will be UK£0.012 per share. Last year, in total, the company distributed UK£0.033 to shareholders. Calculating the last year's worth of payments shows that Chemring Group has a trailing yield of 1.7% on the current share price of £1.896. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Chemring Group has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Chemring Group

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. Chemring Group paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 66% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

LSE:CHG Historical Dividend Yield, August 25th 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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Chemring Group was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Chemring Group's dividend payments per share have declined at 7.2% per year on average over the past 10 years, which is uninspiring.

Remember, you can always get a snapshot of Chemring Group's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Has Chemring Group got what it takes to maintain its dividend payments? It's hard to get used to Chemring Group paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. To summarise, Chemring Group looks okay on this analysis, although it doesn't appear a stand-out opportunity.

Curious what other investors think of Chemring 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.