Dividend Investors: Don't Be Too Quick To Buy Anglo American plc (LON:AAL) For Its Upcoming Dividend

Readers hoping to buy Anglo American plc (LON:AAL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Anglo American's shares on or after the 17th of August will not receive the dividend, which will be paid on the 26th of September.

The company's next dividend payment will be US$0.55 per share. Last year, in total, the company distributed US$1.29 to shareholders. Looking at the last 12 months of distributions, Anglo American has a trailing yield of approximately 4.7% on its current stock price of £21.51. 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 Anglo American can afford its dividend, and if the dividend could grow.

See our latest analysis for Anglo American

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. Anglo American paid out 75% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Anglo American generated enough free cash flow to afford its dividend. Over the past year it paid out 169% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Anglo American paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Anglo American to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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. With that in mind, we're discomforted by Anglo American's 7.0% 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. Anglo American has delivered 4.8% dividend growth per year on average over the past 10 years. 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.

The Bottom Line

Is Anglo American an attractive dividend stock, or better left on the shelf? Anglo American had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

So if you're still interested in Anglo American despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Anglo American has 3 warning signs we think you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.