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Why You Should Leave Harvey Norman Holdings Limited (ASX:HVN)'s Upcoming Dividend On The Shelf

Simply Wall St

Harvey Norman Holdings Limited (ASX:HVN) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 10th of October, you won't be eligible to receive this dividend, when it is paid on the 1st of November.

Harvey Norman Holdings's next dividend payment will be AU$0.2 per share, on the back of last year when the company paid a total of AU$0.3 to shareholders. Based on the last year's worth of payments, Harvey Norman Holdings stock has a trailing yield of around 7.4% on the current share price of A$4.455. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Harvey Norman Holdings

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Harvey Norman Holdings paid out 95% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Harvey Norman Holdings generated enough free cash flow to afford its dividend. Harvey Norman Holdings paid out more free cash flow than it generated - 123%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

As Harvey Norman Holdings'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.

ASX:HVN Historical Dividend Yield, October 6th 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. For this reason, we're glad to see Harvey Norman Holdings's earnings per share have risen 12% per annum over the last five years. We're a bit put out by the fact that Harvey Norman Holdings paid out virtually all of its earnings and cashflow as dividends over the last year. Earnings are growing at a decent clip, so this payout ratio may prove sustainable, but it's not great to see.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Harvey Norman Holdings has delivered an average of 11% per year annual increase in its dividend, based on the past ten years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Harvey Norman Holdings? While it's nice to see earnings per share growing, we're curious about how Harvey Norman Holdings intends to continue growing, or maintain the dividend in a downturn given that it's paying out such a high percentage of its earnings and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Wondering what the future holds for Harvey Norman Holdings? See what the seven 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.