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We Wouldn't Be Too Quick To Buy Chicago Rivet & Machine Co. (NYSEMKT:CVR) Before It Goes Ex-Dividend

Simply Wall St

Readers hoping to buy Chicago Rivet & Machine Co. (NYSEMKT:CVR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 3rd of September, you won't be eligible to receive this dividend, when it is paid on the 18th of September.

Chicago Rivet & Machine's next dividend payment will be US$0.10 per share, and in the last 12 months, the company paid a total of US$0.40 per share. Looking at the last 12 months of distributions, Chicago Rivet & Machine has a trailing yield of approximately 1.9% on its current stock price of $20.53. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Chicago Rivet & Machine can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Chicago Rivet & Machine

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. Chicago Rivet & Machine's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. 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 Chicago Rivet & Machine 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. Luckily it paid out just 19% of its free cash flow last year.

Click here to see how much of its profit Chicago Rivet & Machine paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Chicago Rivet & Machine was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the Chicago Rivet & Machine dividends are largely the same as they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

Get our latest analysis on Chicago Rivet & Machine's balance sheet health here.

The Bottom Line

Has Chicago Rivet & Machine got what it takes to maintain its dividend payments? 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. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Chicago Rivet & Machine despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for Chicago Rivet & Machine (of which 1 makes us a bit uncomfortable!) you should know about.

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.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.