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Why It Might Not Make Sense To Buy American Finance Trust, Inc. (NASDAQ:AFIN) For Its Upcoming Dividend

Simply Wall St

American Finance Trust, Inc. (NASDAQ:AFIN) stock is about to trade ex-dividend in 4 days time. If you purchase the stock on or after the 7th of August, you won't be eligible to receive this dividend, when it is paid on the 15th of August.

American Finance Trust's next dividend payment will be US$0.092 per share, and in the last 12 months, the company paid a total of US$1.10 per share. Based on the last year's worth of payments, American Finance Trust has a trailing yield of 9.3% on the current stock price of $11.81. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for American Finance Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. American Finance Trust paid out 124% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. It's not unusual to see REITs distributing all of their income to shareholders. Yet a payout ratio this high we feel is still cause for concern as it suggests the dividend is being funded from cash on the balance sheet, or by borrowing. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If American Finance Trust didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. American Finance Trust paid out more free cash flow than it generated - 136%, 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.

Click here to see how much of its profit American Finance Trust paid out over the last 12 months.

NasdaqGS:AFIN Historical Dividend Yield, August 2nd 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. American Finance Trust was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last 5 years, making us wonder if the dividend is sustainable at all.

Given that American Finance Trust has only been paying a dividend for a year, there's not much of a past history to draw insight from.

We update our analysis on American Finance Trust every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Should investors buy American Finance Trust for the upcoming dividend? It's hard to get used to American Finance Trust paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not that we think American Finance Trust is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Keen to explore more data on American Finance Trust's financial performance? Check out our 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.

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.