Here's Why We're Wary Of Buying Corby Spirit and Wine's (TSE:CSW.A) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Corby Spirit and Wine Limited (TSE:CSW.A) is about to go ex-dividend in just four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. This means that investors who purchase Corby Spirit and Wine's shares on or after the 26th of February will not receive the dividend, which will be paid on the 13th of March.

The company's next dividend payment will be CA$0.21 per share. Last year, in total, the company distributed CA$0.84 to shareholders. Looking at the last 12 months of distributions, Corby Spirit and Wine has a trailing yield of approximately 6.4% on its current stock price of CA$13.07. 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! As a result, readers should always check whether Corby Spirit and Wine has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Corby Spirit and Wine

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Corby Spirit and Wine distributed an unsustainably high 117% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. 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 (64%) 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 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 how much of its profit Corby Spirit and Wine paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's not ideal to see Corby Spirit and Wine's earnings per share have been shrinking at 4.5% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Corby Spirit and Wine's dividend payments per share have declined at 3.7% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Has Corby Spirit and Wine got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. What's more, Corby Spirit and Wine is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Corby Spirit and Wine.

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 Corby Spirit and Wine. Our analysis shows 3 warning signs for Corby Spirit and Wine that we strongly recommend you have a look at before investing in the company.

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.