Don't Buy Ricegrowers Limited (ASX:SGLLV) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
June 30, 2021
ASX:SGLLV
Source: Shutterstock

Readers hoping to buy Ricegrowers Limited (ASX:SGLLV) 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 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. Thus, you can purchase Ricegrowers' shares before the 6th of July in order to receive the dividend, which the company will pay on the 30th of July.

The company's next dividend payment will be AU$0.33 per share, and in the last 12 months, the company paid a total of AU$0.33 per share. Last year's total dividend payments show that Ricegrowers has a trailing yield of 4.6% on the current share price of A$7.19. 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 investigate whether Ricegrowers can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Ricegrowers

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Ricegrowers paid out 95% 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. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (72%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while Ricegrowers's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

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

historic-dividend
ASX:SGLLV Historic Dividend July 1st 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Ricegrowers's earnings per share have fallen at approximately 17% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Ricegrowers has delivered 4.1% dividend growth per year on average over the past six years. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Ricegrowers is already paying out 95% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Should investors buy Ricegrowers for the upcoming dividend? It's never fun to see a company's earnings per share in retreat. Worse, Ricegrowers's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. 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 Ricegrowers 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 Ricegrowers you should be aware of.

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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