Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Apiam Animal Health Limited (ASX:AHX) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 17th of September, you won’t be eligible to receive this dividend, when it is paid on the 23rd of October.
Apiam Animal Health’s next dividend payment will be AU$0.012 per share, and in the last 12 months, the company paid a total of AU$0.024 per share. Last year’s total dividend payments show that Apiam Animal Health has a trailing yield of 4.1% on the current share price of A$0.5825. If you buy this business for its dividend, you should have an idea of whether Apiam Animal Health’s dividend is reliable and sustainable. So we need to investigate whether Apiam Animal Health can afford its dividend, and if the dividend could grow.
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. Apiam Animal Health paid out more than half (54%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The good news is it paid out just 21% of its free cash flow in the last year.
It’s positive to see that Apiam Animal Health’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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 Apiam Animal Health’s 8.8% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, four years ago, Apiam Animal Health has lifted its dividend by approximately 11% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it’s always worth checking for when the company can’t increase the payout ratio any more – because then the music stops.
Is Apiam Animal Health an attractive dividend stock, or better left on the shelf? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Apiam Animal Health’s dividend merits.
However if you’re still interested in Apiam Animal Health as a potential investment, you should definitely consider some of the risks involved with Apiam Animal Health. In terms of investment risks, we’ve identified 4 warning signs with Apiam Animal Health and understanding them should be part of your investment process.
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.
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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.
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