There's A Lot To Like About Challenger's (ASX:CGF) Upcoming AU$0.12 Dividend

By
Simply Wall St
Published
February 20, 2022
ASX:CGF
Source: Shutterstock

Readers hoping to buy Challenger Limited (ASX:CGF) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Challenger's shares before the 24th of February in order to be eligible for the dividend, which will be paid on the 22nd of March.

The company's next dividend payment will be AU$0.12 per share, on the back of last year when the company paid a total of AU$0.23 to shareholders. Looking at the last 12 months of distributions, Challenger has a trailing yield of approximately 3.4% on its current stock price of A$6.73. 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.

View our latest analysis for Challenger

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Challenger has a low and conservative payout ratio of just 23% of its income after tax.

When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.

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

historic-dividend
ASX:CGF Historic Dividend February 20th 2022

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. Fortunately for readers, Challenger's earnings per share have been growing at 11% a year for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Challenger has lifted its dividend by approximately 3.4% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Challenger is keeping back more of its profits to grow the business.

Final Takeaway

Is Challenger worth buying for its dividend? Companies like Challenger that are growing rapidly and paying out a low fraction of earnings, are usually reinvesting heavily in their business. This is one of the most attractive investment combinations under this analysis, as it can create substantial value for investors over the long run. We think this is a pretty attractive combination, and would be interested in investigating Challenger more closely.

In light of that, while Challenger has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 2 warning signs for Challenger that we strongly recommend you have a look at before investing in the company.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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