Why It Might Not Make Sense To Buy GR Engineering Services Limited (ASX:GNG) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that GR Engineering Services Limited (ASX:GNG) is about to go ex-dividend in just 4 days. You can purchase shares before the 11th of March in order to receive the dividend, which the company will pay on the 1st of April.

GR Engineering Services's upcoming dividend is AU$0.05 a share, following on from the last 12 months, when the company distributed a total of AU$0.10 per share to shareholders. Looking at the last 12 months of distributions, GR Engineering Services has a trailing yield of approximately 7.1% on its current stock price of A$1.4. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for GR Engineering Services

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. GR Engineering Services distributed an unsustainably high 111% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It distributed 27% of its free cash flow as dividends, a comfortable payout level for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and GR Engineering Services fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's not encouraging to see that GR Engineering Services's earnings are effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, GR Engineering Services has increased its dividend at approximately 2.3% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid GR Engineering Services? Earnings per share have been effectively flat, which is a bit of a concern given the company is paying out 111% of its profit as dividends, which we feel is uncomfortably high. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of GR Engineering Services.

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 GR Engineering Services. Every company has risks, and we've spotted 2 warning signs for GR Engineering Services 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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This article by Simply Wall St is general in nature. 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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