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We Wouldn't Be Too Quick To Buy IOOF Holdings Ltd (ASX:IFL) Before It Goes Ex-Dividend

Simply Wall St

Readers hoping to buy IOOF Holdings Ltd (ASX:IFL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 7th of September to receive the dividend, which will be paid on the 22nd of September.

IOOF Holdings's next dividend payment will be AU$0.12 per share. Last year, in total, the company distributed AU$0.28 to shareholders. Last year's total dividend payments show that IOOF Holdings has a trailing yield of 7.7% on the current share price of A$3.58. 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.

See our latest analysis for IOOF Holdings

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. IOOF Holdings paid out 168% 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.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by IOOF Holdings's 19% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. IOOF Holdings's dividend payments per share have declined at 2.1% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Has IOOF Holdings got what it takes to maintain its dividend payments? Not only are earnings per share shrinking, but IOOF Holdings is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

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 IOOF Holdings. Every company has risks, and we've spotted 3 warning signs for IOOF Holdings 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.