Do These 3 Checks Before Buying Smartgroup Corporation Ltd (ASX:SIQ) For Its Upcoming Dividend

By
Simply Wall St
Published
March 03, 2021
ASX:SIQ
Source: Shutterstock

It looks like Smartgroup Corporation Ltd (ASX:SIQ) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 8th of March will not receive the dividend, which will be paid on the 23rd of March.

Smartgroup's next dividend payment will be AU$0.32 per share, and in the last 12 months, the company paid a total of AU$0.49 per share. Calculating the last year's worth of payments shows that Smartgroup has a trailing yield of 7.4% on the current share price of A$6.62. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Smartgroup

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year Smartgroup paid out 108% 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 Smartgroup generated enough free cash flow to afford its dividend. It paid out 92% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given Smartgroup's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

historic-dividend
ASX:SIQ Historic Dividend March 3rd 2021

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Smartgroup earnings per share are up 9.9% per annum over the last five years. Earnings per share have been growing comfortably, although unfortunately the company is paying out more of its profits than we're comfortable with over the long term.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last six years, Smartgroup has lifted its dividend by approximately 42% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Smartgroup an attractive dividend stock, or better left on the shelf? Smartgroup is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Smartgroup.

So if you're still interested in Smartgroup despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Smartgroup has 1 warning sign we think 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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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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