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We Wouldn't Be Too Quick To Buy Lookers plc (LON:LOOK) Before It Goes Ex-Dividend

Simply Wall St

Lookers plc (LON:LOOK) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 17th of October in order to be eligible for this dividend, which will be paid on the 22nd of November.

Lookers's upcoming dividend is UK£0.01 a share, following on from the last 12 months, when the company distributed a total of UK£0.04 per share to shareholders. Based on the last year's worth of payments, Lookers has a trailing yield of 7.7% on the current stock price of £0.527. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Lookers has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Lookers

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. Lookers is paying out an acceptable 55% of its profit, a common payout level among most companies. 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. The company paid out 101% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Lookers paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Lookers's ability to maintain its dividend.

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

LSE:LOOK Historical Dividend Yield, October 13th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Lookers's earnings per share have been shrinking at 4.5% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Lookers has delivered an average of 15% per year annual increase in its dividend, based on the past nine years of dividend payments. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

From a dividend perspective, should investors buy or avoid Lookers? Lookers had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Ever wonder what the future holds for Lookers? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.