Stock Analysis

We Wouldn't Be Too Quick To Buy ASX Limited (ASX:ASX) Before It Goes Ex-Dividend

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ASX:ASX
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Readers hoping to buy ASX Limited (ASX:ASX) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 4th of March will not receive the dividend, which will be paid on the 24th of March.

ASX's next dividend payment will be AU$1.12 per share. Last year, in total, the company distributed AU$2.35 to shareholders. Based on the last year's worth of payments, ASX has a trailing yield of 3.5% on the current stock price of A$67.6. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for ASX

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, ASX paid out 93% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business.

Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.

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

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ASX:ASX Historic Dividend February 27th 2021

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at ASX, with earnings per share up 4.2% on average over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. ASX has delivered an average of 3.1% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

From a dividend perspective, should investors buy or avoid ASX? ASX has been growing earnings per share at a reasonable rate, but over the last year its dividend was not well covered by earnings. ASX doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.

With that being said, if you're still considering ASX as an investment, you'll find it beneficial to know what risks this stock is facing. Case in point: We've spotted 1 warning sign for ASX you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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