It Might Not Be A Great Idea To Buy Insurance Australia Group Limited (ASX:IAG) For Its Next Dividend

Insurance Australia Group Limited (ASX:IAG) is about to trade ex-dividend in the next three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a 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 Insurance Australia Group's shares before the 17th of August in order to be eligible for the dividend, which will be paid on the 22nd of September.

The company's upcoming dividend is AU$0.13 a share, following on from the last 12 months, when the company distributed a total of AU$0.26 per share to shareholders. Based on the last year's worth of payments, Insurance Australia Group stock has a trailing yield of around 4.8% on the current share price of A$5.43. If you buy this business for its dividend, you should have an idea of whether Insurance Australia Group's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Insurance Australia Group

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. Insurance Australia Group reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Insurance Australia Group reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Insurance Australia Group also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Insurance Australia Group has delivered an average of 5.4% per year annual increase in its dividend, based on the past 10 years of dividend payments.

Remember, you can always get a snapshot of Insurance Australia Group's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Is Insurance Australia Group an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Worse, the general trend in its earnings looks negative in recent years. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

With that being said, if you're still considering Insurance Australia Group as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 2 warning signs for Insurance Australia Group that we recommend you consider before investing in the business.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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