The Star Entertainment Group Limited (ASX:SGR) is about to trade ex-dividend in the next 2 days. You will need to purchase shares before the 21st of August to receive the dividend, which will be paid on the 26th of September.
Star Entertainment Group’s next dividend payment will be AU$0.10 per share, on the back of last year when the company paid a total of AU$0.23 to shareholders. Looking at the last 12 months of distributions, Star Entertainment Group has a trailing yield of approximately 5.4% on its current stock price of A$3.79. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it’s growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 79% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We’d be worried about the risk of a drop in earnings. 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. Over the last year, it paid out dividends equivalent to 280% of what it generated in free cash flow, a disturbingly high percentage. It’s pretty hard to pay out more than you earn, so we wonder how Star Entertainment Group intends to continue funding this dividend, or if it could be forced to the payment.
While Star Entertainment 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 Star Entertainment Group’s ability to maintain its dividend.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It’s encouraging to see Star Entertainment Group has grown its earnings rapidly, up 24% a year 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.
We’d also point out that Star Entertainment Group issued a meaningful number of new shares in the past year. It’s hard to grow dividends per share when a company keeps creating new shares.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 7 years ago, Star Entertainment Group has lifted its dividend by approximately 14% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
Should investors buy Star Entertainment Group for the upcoming dividend? Earnings per share growth is a positive, and the company’s payout ratio looks normal. However, we note Star Entertainment Group paid out a much higher percentage of its free cash flow, which makes us uncomfortable. While it does have some good things going for it, we’re a bit ambivalent and it would take more to convince us of Star Entertainment Group’s dividend merits.
Ever wonder what the future holds for Star Entertainment Group? See what the ten analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
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.
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 email@example.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.