It Might Not Be A Great Idea To Buy Coats Group plc (LON:COA) For Its Next Dividend

It looks like Coats Group plc (LON:COA) is about to go ex-dividend in the next three days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Accordingly, Coats Group investors that purchase the stock on or after the 16th of October will not receive the dividend, which will be paid on the 13th of November.

The company's upcoming dividend is US$0.01 a share, following on from the last 12 months, when the company distributed a total of US$0.032 per share to shareholders. Last year's total dividend payments show that Coats Group has a trailing yield of 3.0% on the current share price of UK£0.793. If you buy this business for its dividend, you should have an idea of whether Coats Group's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. Coats Group is paying out an acceptable 61% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Coats Group generated enough free cash flow to afford its dividend. Over the last year it paid out 73% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Coats Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

See our latest analysis for Coats Group

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. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Coats Group's earnings per share have dropped 8.0% a year over 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 last nine years, Coats Group has lifted its dividend by approximately 11% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

Has Coats Group got what it takes to maintain its dividend payments? While earnings per share are shrinking, it's encouraging to see that at least Coats Group's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: Coats Group has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Coats Group as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Coats Group has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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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.