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We Wouldn't Be Too Quick To Buy Countplus Limited (ASX:CUP) Before It Goes Ex-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 Countplus Limited (ASX:CUP) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 26th of September, you won't be eligible to receive this dividend, when it is paid on the 16th of October.

Countplus's upcoming dividend is AU$0.01 a share, following on from the last 12 months, when the company distributed a total of AU$0.02 per share to shareholders. Calculating the last year's worth of payments shows that Countplus has a trailing yield of 2.2% on the current share price of A$0.93. 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! So we need to investigate whether Countplus can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Countplus

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. Countplus paid out 135% 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. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 45% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while Countplus's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

ASX:CUP Historical Dividend Yield, September 22nd 2019

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. Countplus's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 32% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Countplus has seen its dividend decline 14% per annum on average over the past nine years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Countplus an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 135% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income 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.

Keen to explore more data on Countplus's financial performance? Check out our visualisation of its historical revenue and earnings growth.

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.