Don't Buy Yellow Pages Limited (TSE:Y) 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 Yellow Pages Limited (TSE:Y) is about to trade ex-dividend in the next 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 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 Yellow Pages' shares before the 26th of November to receive the dividend, which will be paid on the 15th of December.

The company's upcoming dividend is CA$0.25 a share, following on from the last 12 months, when the company distributed a total of CA$1.00 per share to shareholders. Looking at the last 12 months of distributions, Yellow Pages has a trailing yield of approximately 8.7% on its current stock price of CA$11.46. 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! So we need to investigate whether Yellow Pages can afford its dividend, and if the dividend could grow.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Yellow Pages paid out 102% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 45% of its free cash flow in the past year.

It's good to see that while Yellow Pages's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

View our latest analysis for Yellow Pages

Click here to see how much of its profit Yellow Pages paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Yellow Pages's 23% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past six years, Yellow Pages has increased its dividend at approximately 15% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Yellow Pages is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Is Yellow Pages an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 102% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Yellow Pages's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Yellow Pages and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Yellow Pages that we recommend you consider before investing in the business.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.