Readers hoping to buy GWA Group Limited (ASX:GWA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 15th of March in order to receive the dividend, which the company will pay on the 20th of April.
GWA Group's next dividend payment will be AU$0.06 per share. Last year, in total, the company distributed AU$0.095 to shareholders. Looking at the last 12 months of distributions, GWA Group has a trailing yield of approximately 3.1% on its current stock price of A$3.05. If you buy this business for its dividend, you should have an idea of whether GWA Group's dividend is reliable and sustainable. So we need to investigate whether GWA Group can afford its dividend, and if the dividend could grow.
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. GWA Group paid out more than half (65%) 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. Thankfully its dividend payments took up just 45% of the free cash flow it generated, which is a comfortable payout ratio.
It's positive to see that GWA Group'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?
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. That's why it's comforting to see GWA Group's earnings have been skyrocketing, up 34% per annum for the past five years. Management appears to be striking a nice balance between reinvesting for growth and paying dividends to shareholders. With a reasonable payout ratio, profits being reinvested, and some earnings growth, GWA Group could have strong prospects for future increases to the dividend.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. GWA Group's dividend payments per share have declined at 7.1% 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.
Should investors buy GWA Group for the upcoming dividend? We like GWA Group's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. There's a lot to like about GWA Group, and we would prioritise taking a closer look at it.
In light of that, while GWA Group has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 2 warning signs for GWA Group that we recommend you consider before investing in the business.
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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