Stock Analysis

Why It Might Not Make Sense To Buy Argo Investments Limited (ASX:ARG) For Its Upcoming Dividend

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ASX:ARG
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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 Argo Investments Limited (ASX:ARG) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 19th of February in order to be eligible for this dividend, which will be paid on the 12th of March.

Argo Investments's next dividend payment will be AU$0.14 per share. Last year, in total, the company distributed AU$0.30 to shareholders. Looking at the last 12 months of distributions, Argo Investments has a trailing yield of approximately 3.4% on its current stock price of A$8.91. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Argo Investments has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Argo Investments

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. Argo Investments distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.

Click here to see how much of its profit Argo Investments paid out over the last 12 months.

historic-dividend
ASX:ARG Historic Dividend February 14th 2021

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Argo Investments's earnings per share have fallen at approximately 9.8% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Argo Investments has lifted its dividend by approximately 1.8% a year on average.

To Sum It Up

Should investors buy Argo Investments for the upcoming dividend? Not only are earnings per share shrinking, but Argo Investments is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

So if you're still interested in Argo Investments despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Our analysis shows 2 warning signs for Argo Investments that we strongly recommend you have a look at before investing in the company.

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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