Don't Race Out To Buy Link Administration Holdings Limited (ASX:LNK) Just Because It's Going Ex-Dividend

Readers hoping to buy Link Administration Holdings Limited (ASX:LNK) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 1st of September, you won't be eligible to receive this dividend, when it is paid on the 25th of September.

Link Administration Holdings's next dividend payment will be AU$0.035 per share, on the back of last year when the company paid a total of AU$0.10 to shareholders. Looking at the last 12 months of distributions, Link Administration Holdings has a trailing yield of approximately 2.4% on its current stock price of A$4.1. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Link Administration Holdings can afford its dividend, and if the dividend could grow.

See our latest analysis for Link Administration Holdings

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. Link Administration Holdings lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the 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. Link Administration Holdings paid out more free cash flow than it generated - 123%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. Link Administration Holdings reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last four years, Link Administration Holdings has lifted its dividend by approximately 5.7% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

We update our analysis on Link Administration Holdings every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Is Link Administration Holdings an attractive dividend stock, or better left on the shelf? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. It's not that we think Link Administration Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Link Administration Holdings don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Link Administration Holdings is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.

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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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