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We Wouldn't Be Too Quick To Buy A.P. Eagers Limited (ASX:APE) Before It Goes Ex-Dividend

Simply Wall St

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that A.P. Eagers Limited (ASX:APE) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 31st of March will not receive this dividend, which will be paid on the 20th of April.

A.P. Eagers's next dividend payment will be AU$0.11 per share, on the back of last year when the company paid a total of AU$0.25 to shareholders. Calculating the last year's worth of payments shows that A.P. Eagers has a trailing yield of 8.4% on the current share price of A$3.01. 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 check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for A.P. Eagers

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. A.P. Eagers 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 cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

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

ASX:APE Historical Dividend Yield March 26th 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. A.P. Eagers 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.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, A.P. Eagers has increased its dividend at approximately 11% a year on average.

Get our latest analysis on A.P. Eagers's balance sheet health here.

The Bottom Line

Should investors buy A.P. Eagers for the upcoming dividend? 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. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of A.P. Eagers.

With that being said, if you're still considering A.P. Eagers as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 4 warning signs for A.P. Eagers (1 can't be ignored!) that you ought to be aware of before buying the shares.

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.

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.

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. Thank you for reading.