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We Wouldn't Be Too Quick To Buy The Citadel Group Limited (ASX:CGL) Before It Goes Ex-Dividend

Simply Wall St

It looks like The Citadel Group Limited (ASX:CGL) is about to go ex-dividend in the next 3 days. You can purchase shares before the 2nd of September in order to receive the dividend, which the company will pay on the 1st of October.

Citadel Group's upcoming dividend is AU$0.06 a share, following on from the last 12 months, when the company distributed a total of AU$0.11 per share to shareholders. Calculating the last year's worth of payments shows that Citadel Group has a trailing yield of 2.5% on the current share price of A$4.39. 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 Citadel Group can afford its dividend, and if the dividend could grow.

See our latest analysis for Citadel Group

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. Citadel Group reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Citadel Group 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. Thankfully its dividend payments took up just 34% of the free cash flow it generated, which is a comfortable payout ratio.

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


Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Citadel Group 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.

We'd also point out that Citadel Group issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past five years, Citadel Group has increased its dividend at approximately 13% a year on average.

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

Final Takeaway

Should investors buy Citadel Group for the upcoming dividend? It's hard to get used to Citadel Group paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Bottom line: Citadel Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Citadel Group. For example, Citadel Group has 4 warning signs (and 2 which are potentially serious) we think you should know about.

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.

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.