Is It Smart To Buy Grange Resources Limited (ASX:GRR) Before It Goes Ex-Dividend?

Grange Resources Limited (ASX:GRR) stock is about to trade ex-dividend in 4 days. Investors can purchase shares before the 12th of March in order to be eligible for this dividend, which will be paid on the 30th of March.

Grange Resources's next dividend payment will be AU$0.02 per share, on the back of last year when the company paid a total of AU$0.04 to shareholders. Based on the last year's worth of payments, Grange Resources has a trailing yield of 7.3% on the current stock price of A$0.55. If you buy this business for its dividend, you should have an idea of whether Grange Resources's dividend is reliable and sustainable. So we need to investigate whether Grange Resources can afford its dividend, and if the dividend could grow.

See our latest analysis for Grange Resources

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. Grange Resources has a low and conservative payout ratio of just 17% of its income after tax. 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 16% of its free cash flow as dividends last year, which is conservatively low.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Grange Resources has grown its earnings rapidly, up 52% a year for the past five years. Grange Resources looks like a real growth company, with earnings per share growing at a cracking pace and the company reinvesting most of its profits in the business.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. It looks like the Grange Resources dividends are largely the same as they were 10 years ago.

Final Takeaway

Should investors buy Grange Resources for the upcoming dividend? It's great that Grange Resources is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There's a lot to like about Grange Resources, and we would prioritise taking a closer look at it.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. For example - Grange Resources has 2 warning signs we think you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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