Four Days Left Until Adairs Limited (ASX:ADH) Trades Ex-Dividend

It looks like Adairs Limited (ASX:ADH) is about to go ex-dividend in the next four days. 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Adairs' shares before the 11th of September to receive the dividend, which will be paid on the 8th of October.

The company's next dividend payment will be AU$0.07 per share. Last year, in total, the company distributed AU$0.14 to shareholders. Looking at the last 12 months of distributions, Adairs has a trailing yield of approximately 7.1% on its current stock price of AU$1.96. 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.

See our latest analysis for Adairs

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. Adairs paid out 67% of its earnings to investors last year, a normal payout level for most businesses. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 11% of its cash flow last year.

It's positive to see that Adairs's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Adairs's earnings per share have remained 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past nine years, Adairs has increased its dividend at approximately 3.8% a year on average.

The Bottom Line

Should investors buy Adairs for the upcoming dividend? The payout ratios appear reasonably conservative, which implies the dividend may be somewhat sustainable. Still, with earnings basically flat, Adairs doesn't stand out from a dividend perspective. Overall, it's hard to get excited about Adairs from a dividend perspective.

If you're not too concerned about Adairs's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Case in point: We've spotted 1 warning sign for Adairs you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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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.