Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see GWA Group Limited (ASX:GWA) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 8th of September to receive the dividend, which will be paid on the 16th of October.
GWA Group’s next dividend payment will be AU$0.035 per share, and in the last 12 months, the company paid a total of AU$0.12 per share. Based on the last year’s worth of payments, GWA Group has a trailing yield of 4.4% on the current stock price of A$2.62. If you buy this business for its dividend, you should have an idea of whether GWA Group’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.
See our latest analysis for GWA Group
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. GWA Group paid out more than half (69%) 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 company paid out 95% 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.
While GWA Group’s dividends were covered by the company’s reported profits, cash is somewhat more important, so it’s not great to see that the company didn’t generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to GWA Group’s ability to maintain its dividend.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That’s why it’s comforting to see GWA Group’s earnings have been skyrocketing, up 37% per annum for the past five years. Earnings have been growing quickly, but we’re concerned dividend payments consumed most of the company’s cash flow over the past year.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. GWA Group’s dividend payments per share have declined at 5.3% per year on average over the past 10 years, which is uninspiring. GWA Group is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It’s unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.
The Bottom Line
Should investors buy GWA Group for the upcoming dividend? It’s good to see that earnings per share are growing and that the company’s payout ratio is within a normal range for most businesses. However we’re somewhat concerned that it paid out 95% of its cashflow, which is uncomfortably high. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of GWA Group’s dividend merits.
If you want to look further into GWA Group, it’s worth knowing the risks this business faces. In terms of investment risks, we’ve identified 3 warning signs with GWA Group and understanding them should be part of your investment process.
We wouldn’t recommend just buying the first dividend stock you see, though. Here’s a list of interesting 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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