Some investors rely on dividends for growing their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Ashley Services Group Limited (ASX:ASH) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 27th of August will not receive the dividend, which will be paid on the 6th of September.
Ashley Services Group’s next dividend payment will be AU$0.027 per share, which looks like a nice increase on last year, when the company distributed a total of AU$0.025 to shareholders. If you buy this business for its dividend, you should have an idea of whether Ashley Services Group’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.
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. Ashley Services Group paid out 68% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 65% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we’re discomforted by Ashley Services Group’s 19% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Ashley Services Group’s dividend payments per share have declined at 10% per year on average over the past 5 years, which is uninspiring. 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.
To Sum It Up
Has Ashley Services Group got what it takes to maintain its dividend payments? While earnings per share are shrinking, it’s encouraging to see that at least Ashley Services Group’s dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: Ashley Services Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.
Curious about whether Ashley Services Group has been able to consistently generate growth? Here’s a chart of its historical revenue and earnings growth.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.