Stock Analysis

Dividend Investors: Don't Be Too Quick To Buy Australian United Investment Company Limited (ASX:AUI) For Its Upcoming Dividend

  •  Updated
ASX:AUI
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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Australian United Investment Company Limited (ASX:AUI) is about to trade ex-dividend in the next two days. Investors can purchase shares before the 23rd of February in order to be eligible for this dividend, which will be paid on the 17th of March.

Australian United Investment's next dividend payment will be AU$0.17 per share, and in the last 12 months, the company paid a total of AU$0.36 per share. Last year's total dividend payments show that Australian United Investment has a trailing yield of 3.9% on the current share price of A$9.26. 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 investigate whether Australian United Investment can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Australian United Investment

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. Australian United Investment distributed an unsustainably high 146% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

Click here to see how much of its profit Australian United Investment paid out over the last 12 months.

historic-dividend
ASX:AUI Historic Dividend February 20th 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. With that in mind, we're discomforted by Australian United Investment's 11% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Australian United Investment has lifted its dividend by approximately 3.5% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Australian United Investment is already paying out 146% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Australian United Investment an attractive dividend stock, or better left on the shelf? Earnings per share are in decline and Australian United Investment is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Australian United Investment. For example, Australian United Investment has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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