Don't Buy Chesnara plc (LON:CSN) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
April 04, 2021
LSE:CSN

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Chesnara plc (LON:CSN) is about to trade ex-dividend in the next 3 days. You can purchase shares before the 8th of April in order to receive the dividend, which the company will pay on the 24th of May.

Chesnara's upcoming dividend is UK£0.14 a share, following on from the last 12 months, when the company distributed a total of UK£0.22 per share to shareholders. Last year's total dividend payments show that Chesnara has a trailing yield of 7.6% on the current share price of £2.9. If you buy this business for its dividend, you should have an idea of whether Chesnara's dividend is reliable and sustainable. As a result, readers should always check whether Chesnara has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Chesnara

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. Chesnara distributed an unsustainably high 155% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut.

When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.

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

historic-dividend
LSE:CSN Historic Dividend April 4th 2021

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 Chesnara's earnings per share have dropped 15% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Chesnara has increased its dividend at approximately 3.0% 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. Chesnara is already paying out 155% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid Chesnara? Earnings per share are in decline and Chesnara is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

Although, if you're still interested in Chesnara and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 3 warning signs for Chesnara (of which 1 is a bit concerning!) you should know about.

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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This article by Simply Wall St is general in nature. 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.
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