Here's Why We're Wary Of Buying CPPGroup's (LON:CPP) For Its Upcoming Dividend

By
Simply Wall St
Published
August 28, 2021
AIM:CPP
Source: Shutterstock

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 CPPGroup Plc (LON:CPP) is about to go ex-dividend in just three 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase CPPGroup's shares on or after the 2nd of September, you won't be eligible to receive the dividend, when it is paid on the 24th of September.

The company's next dividend payment will be UK£0.05 per share, on the back of last year when the company paid a total of UK£0.10 to shareholders. Calculating the last year's worth of payments shows that CPPGroup has a trailing yield of 2.2% on the current share price of £4.65. If you buy this business for its dividend, you should have an idea of whether CPPGroup's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for CPPGroup

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. CPPGroup reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 62% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

historic-dividend
AIM:CPP Historic Dividend August 29th 2021

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. CPPGroup was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. CPPGroup's dividend payments per share have declined at 37% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

We update our analysis on CPPGroup every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Should investors buy CPPGroup for the upcoming dividend? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

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 CPPGroup. To that end, you should learn about the 3 warning signs we've spotted with CPPGroup (including 2 which are concerning).

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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