It Might Not Be A Great Idea To Buy LifeWorks Inc. (TSE:LWRK) For Its Next Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see LifeWorks Inc. (TSE:LWRK) is about to trade ex-dividend in the next 4 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. In other words, investors can purchase LifeWorks' shares before the 25th of February in order to be eligible for the dividend, which will be paid on the 15th of March.

The company's next dividend payment will be CA$0.065 per share, on the back of last year when the company paid a total of CA$0.78 to shareholders. Based on the last year's worth of payments, LifeWorks has a trailing yield of 2.8% on the current stock price of CA$27.46. If you buy this business for its dividend, you should have an idea of whether LifeWorks's dividend is reliable and sustainable. So we need to investigate whether LifeWorks can afford its dividend, and if the dividend could grow.

Check out our latest analysis for LifeWorks

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. LifeWorks paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out more than half (72%) of its free cash flow in the past year, which is within an average range for most companies.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. LifeWorks reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the LifeWorks dividends are largely the same as they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Remember, you can always get a snapshot of LifeWorks's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Is LifeWorks worth buying for its dividend? It's hard to get used to LifeWorks paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not that we think LifeWorks is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in LifeWorks despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we've identified 3 warning signs for LifeWorks (1 is concerning) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.