Don't Buy SG Fleet Group Limited (ASX:SGF) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see SG Fleet Group Limited (ASX:SGF) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 15th of March, you won't be eligible to receive this dividend, when it is paid on the 13th of April.

SG Fleet Group's next dividend payment will be AU$0.072 per share. Last year, in total, the company distributed AU$0.10 to shareholders. Looking at the last 12 months of distributions, SG Fleet Group has a trailing yield of approximately 3.9% on its current stock price of A$2.61. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for SG Fleet Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SG Fleet Group paid out 71% 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. Thankfully its dividend payments took up just 44% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that SG Fleet 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.

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

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. So we're not too excited that SG Fleet Group's earnings are down 2.9% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past seven years, SG Fleet Group has increased its dividend at approximately 14% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

The Bottom Line

Has SG Fleet Group got what it takes to maintain its dividend payments? We're not enthused by the declining earnings per share, although at least the company's payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

So if you want to do more digging on SG Fleet Group, you'll find it worthwhile knowing the risks that this stock faces. Our analysis shows 3 warning signs for SG Fleet Group that we strongly recommend you have a look at before investing in the company.

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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