Do These 3 Checks Before Buying GWA Group Limited (ASX:GWA) For Its Upcoming Dividend

By
Simply Wall St
Published
September 02, 2021
ASX:GWA
Source: Shutterstock

GWA Group Limited (ASX:GWA) stock is about to trade ex-dividend in four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase GWA Group's shares on or after the 7th of September will not receive the dividend, which will be paid on the 6th of October.

The company's next dividend payment will be AU$0.065 per share, on the back of last year when the company paid a total of AU$0.13 to shareholders. Based on the last year's worth of payments, GWA Group has a trailing yield of 4.5% on the current stock price of A$2.78. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for GWA Group

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. Last year GWA Group paid out 94% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether GWA Group generated enough free cash flow to afford its dividend. Fortunately, it paid out only 30% of its free cash flow in the past year.

It's good to see that while GWA Group's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

historic-dividend
ASX:GWA Historic Dividend September 2nd 2021

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by GWA Group's 7.0% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. GWA Group has seen its dividend decline 4.5% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Is GWA Group an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 94% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering GWA Group as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 2 warning signs for GWA Group you should be aware of.

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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