Don't Buy Corby Spirit and Wine Limited (TSE:CSW.A) For Its Next Dividend Without Doing These Checks

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Corby Spirit and Wine Limited (TSE:CSW.A) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a 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. Meaning, you will need to purchase Corby Spirit and Wine's shares before the 26th of February to receive the dividend, which will be paid on the 12th of March.

The company's next dividend payment will be CA$0.23 per share, on the back of last year when the company paid a total of CA$0.88 to shareholders. Looking at the last 12 months of distributions, Corby Spirit and Wine has a trailing yield of approximately 6.0% on its current stock price of CA$14.57. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Corby Spirit and Wine

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. Last year, Corby Spirit and Wine paid out 94% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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 more than half (58%) 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 Corby Spirit and Wine's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see how much of its profit Corby Spirit and Wine paid out over the last 12 months.

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 earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Corby Spirit and Wine's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Corby Spirit and Wine has increased its dividend at approximately 2.0% a year on average.

Final Takeaway

Has Corby Spirit and Wine got what it takes to maintain its dividend payments? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Corby Spirit and Wine despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To that end, you should learn about the 3 warning signs we've spotted with Corby Spirit and Wine (including 1 which is a bit concerning).

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.