Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sunland Group Limited (ASX:SDG) is about to trade ex-dividend in the next 4 days. Investors can purchase shares before the 4th of September in order to be eligible for this dividend, which will be paid on the 20th of September.
Sunland Group's next dividend payment will be AU$0.04 per share. Last year, in total, the company distributed AU$0.08 to shareholders. Looking at the last 12 months of distributions, Sunland Group has a trailing yield of approximately 4.9% on its current stock price of A$1.645. 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! As a result, readers should always check whether Sunland Group has been able to grow its dividends, or if the dividend might be cut.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Sunland Group paid out 67% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Sunland Group generated enough free cash flow to afford its dividend. Luckily it paid out just 16% of its free cash flow last year.
It's positive to see that Sunland Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. With that in mind, we're encouraged by the steady growth at Sunland Group, with earnings per share up 8.3% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Sunland Group has seen its dividend decline 2.2% per annum on average over the past 10 years, which is not great to see. Sunland Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Has Sunland Group got what it takes to maintain its dividend payments? While earnings per share growth has been modest, Sunland Group's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. In summary, while it has some positive characteristics, we're not inclined to race out and buy Sunland Group today.
Want to learn more about Sunland Group's dividend performance? Check out this visualisation of its historical revenue and earnings growth.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.