Dividend Investors: Don't Be Too Quick To Buy Reef Casino Trust (ASX:RCT) For Its Upcoming Dividend

It looks like Reef Casino Trust (ASX:RCT) is about to go ex-dividend in the next 4 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Reef Casino Trust's shares before the 27th of June in order to be eligible for the dividend, which will be paid on the 10th of September.

The company's next dividend payment will be AU$0.066 per share, on the back of last year when the company paid a total of AU$0.20 to shareholders. Based on the last year's worth of payments, Reef Casino Trust has a trailing yield of 6.5% on the current stock price of AU$3.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Reef Casino Trust paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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. Over the past year it paid out 164% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

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

See our latest analysis for Reef Casino Trust

Click here to see how much of its profit Reef Casino Trust paid out over the last 12 months.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Reef Casino Trust, with earnings per share up 8.8% on average 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. Reef Casino Trust's dividend payments per share have declined at 2.4% per year on average over the past 10 years, which is uninspiring. Reef Casino Trust 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.

The Bottom Line

Is Reef Casino Trust worth buying for its dividend? Reef Casino Trust is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering Reef Casino Trust as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Reef Casino Trust and you should be aware of these before buying any shares.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.