It Might Not Be A Great Idea To Buy Hercules Site Services Plc (LON:HERC) For Its Next Dividend

It looks like Hercules Site Services Plc (LON:HERC) is about to go ex-dividend in the next four 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Hercules Site Services' shares before the 22nd of February in order to be eligible for the dividend, which will be paid on the 22nd of March.

The company's next dividend payment will be UK£0.0112 per share. Last year, in total, the company distributed UK£0.017 to shareholders. Based on the last year's worth of payments, Hercules Site Services stock has a trailing yield of around 5.1% on the current share price of UK£0.3375. 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 investigate whether Hercules Site Services can afford its dividend, and if the dividend could grow.

View our latest analysis for Hercules Site Services

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Hercules Site Services distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 16% of its cash flow last year.

It's good to see that while Hercules Site Services'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.

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

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. Hercules Site Services's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 80% a year over the past five years.

Hercules Site Services also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hercules Site Services has delivered an average of 0.6% per year annual increase in its dividend, based on the past two years of dividend payments.

The Bottom Line

Is Hercules Site Services an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 136% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Hercules Site Services's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Hercules Site Services and want to know more, you'll find it very useful to know what risks this stock faces. To help with this, we've discovered 4 warning signs for Hercules Site Services (1 is concerning!) that you ought to be aware of before buying the shares.

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.