Here's Why We're Wary Of Buying SG Fleet Group's (ASX:SGF) For Its Upcoming Dividend

SG Fleet Group Limited (ASX:SGF) stock is about to trade ex-dividend in four days. Ex-dividend means that investors that purchase the stock on or after the 14th of September will not receive this dividend, which will be paid on the 6th of October.

SG Fleet Group's next dividend payment will be AU$0.031 per share, and in the last 12 months, the company paid a total of AU$0.10 per share. Looking at the last 12 months of distributions, SG Fleet Group has a trailing yield of approximately 6.5% on its current stock price of A$1.545. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for SG Fleet Group

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. SG Fleet Group paid out more than half (71%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out more than three-quarters (87%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

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.

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 fall far enough, the company could be forced to cut its dividend. So we're not too excited that SG Fleet Group's earnings are down 3.4% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, six years ago, SG Fleet Group has lifted its dividend by approximately 16% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

Is SG Fleet Group an attractive dividend stock, or better left on the shelf? While earnings per share are shrinking, it's encouraging to see that at least SG Fleet Group's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of SG Fleet Group.

With that in mind though, if the poor dividend characteristics of SG Fleet Group don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 4 warning signs with SG Fleet Group and understanding them should be part of your investment process.

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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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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