Don't Race Out To Buy LifeWorks Inc. (TSE:LWRK) Just Because It's Going Ex-Dividend

LifeWorks Inc. (TSE:LWRK) is about to trade ex-dividend in the next 3 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. 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. This means that investors who purchase LifeWorks' shares on or after the 28th of May will not receive the dividend, which will be paid on the 15th of June.

The company's upcoming dividend is CA$0.065 a share, following on from the last 12 months, when the company distributed a total of CA$0.78 per share to shareholders. Based on the last year's worth of payments, LifeWorks stock has a trailing yield of around 2.3% on the current share price of CA$33.99. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for LifeWorks

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. An unusually high payout ratio of 201% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether LifeWorks generated enough free cash flow to afford its dividend. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.

It's good to see that while LifeWorks's dividends were not covered by profits, at least they are affordable from a cash perspective. 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?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at LifeWorks, with earnings per share up 3.2% on average over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. LifeWorks has seen its dividend decline 1.9% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

Is LifeWorks an attractive dividend stock, or better left on the shelf? While earnings per share have been growing slowly, LifeWorks is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of LifeWorks.

With that in mind though, if the poor dividend characteristics of LifeWorks don't faze you, it's worth being mindful of the risks involved with this business. For example, we've found 3 warning signs for LifeWorks (1 doesn't sit too well with us!) that deserve your attention before investing in the shares.

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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