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Why It Might Not Make Sense To Buy Signet Jewelers Limited (NYSE:SIG) For Its Upcoming Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Signet Jewelers Limited (NYSE:SIG) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 1st of August to receive the dividend, which will be paid on the 30th of August.

Signet Jewelers's next dividend payment will be US$0.37 per share, and in the last 12 months, the company paid a total of US$1.48 per share. Last year's total dividend payments show that Signet Jewelers has a trailing yield of 8.5% on the current share price of $17.47. 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 Signet Jewelers has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Signet Jewelers

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Signet Jewelers lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. 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 Signet Jewelers 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. What's good is that dividends were well covered by free cash flow, with the company paying out 17% of its cash flow last year.

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

NYSE:SIG Historical Dividend Yield, July 27th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Signet Jewelers reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Signet Jewelers has delivered an average of 14% per year annual increase in its dividend, based on the past 10 years of dividend payments.

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

To Sum It Up

From a dividend perspective, should investors buy or avoid Signet Jewelers? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Curious what other investors think of Signet Jewelers? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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.