Don't Race Out To Buy Sienna Senior Living Inc. (TSE:SIA) Just Because It's Going Ex-Dividend

Sienna Senior Living Inc. (TSE:SIA) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Sienna Senior Living's shares before the 27th of September to receive the dividend, which will be paid on the 15th of October.

The company's next dividend payment will be CA$0.078 per share, and in the last 12 months, the company paid a total of CA$0.94 per share. Looking at the last 12 months of distributions, Sienna Senior Living has a trailing yield of approximately 5.5% on its current stock price of CA$16.96. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Sienna Senior Living has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Sienna Senior Living

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Sienna Senior Living paid out a disturbingly high 238% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Sienna Senior Living generated enough free cash flow to afford its dividend. Over the past year it paid out 118% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Sienna Senior Living's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Sienna Senior Living's earnings per share have been growing at 15% a year for the past five years. Earnings are growing pretty quickly, which is great, but it's uncomfortably to see the company paying out 238% of earnings. We're wary of fast-growing companies flaming out by over-committing themselves financially, and consider this a yellow flag.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Sienna Senior Living's dividend payments are broadly unchanged compared to where they were 10 years ago.

To Sum It Up

Is Sienna Senior Living an attractive dividend stock, or better left on the shelf? Earnings per share have been growing, despite the company paying out a concerningly high percentage of its earnings and cashflow. We struggle to see how a company paying out so much of its earnings and cash flow will be able to sustain its dividend in a downturn, or reinvest enough into its business to continue growing earnings without borrowing heavily. It's not that we think Sienna Senior Living is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Sienna Senior Living 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 Sienna Senior Living (2 are significant) 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.