Here's Why We're Wary Of Buying IRESS' (ASX:IRE) For Its Upcoming Dividend

Readers hoping to buy IRESS Limited (ASX:IRE) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 24th of February to receive the dividend, which will be paid on the 19th of March.

IRESS's next dividend payment will be AU$0.30 per share, and in the last 12 months, the company paid a total of AU$0.46 per share. Last year's total dividend payments show that IRESS has a trailing yield of 4.6% on the current share price of A$9.96. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether IRESS can afford its dividend, and if the dividend could grow.

Check out our latest analysis for IRESS

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. IRESS distributed an unsustainably high 143% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. It paid out 80% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and IRESS 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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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. 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 not encouraging to see that IRESS's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

We'd also point out that IRESS issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, IRESS has increased its dividend at approximately 3.1% a year on average.

To Sum It Up

Has IRESS got what it takes to maintain its dividend payments? The company has not generated any growth in earnings per share over the 10-year timeframe we measured. Additionally, IRESS is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of IRESS.

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 IRESS. Every company has risks, and we've spotted 2 warning signs for IRESS (of which 1 can't be ignored!) you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top 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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