Don't Buy Circle Property Plc (LON:CRC) For Its Next Dividend Without Doing These Checks

Readers hoping to buy Circle Property Plc (LON:CRC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 3rd of December will not receive the dividend, which will be paid on the 8th of January.

Circle Property's next dividend payment will be UK£0.025 per share, and in the last 12 months, the company paid a total of UK£0.053 per share. Based on the last year's worth of payments, Circle Property has a trailing yield of 3.0% on the current stock price of £1.75. 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 Circle Property can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Circle Property

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. It paid out 77% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. 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 Circle Property'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.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Circle Property's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 45% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Circle Property has delivered an average of 17% per year annual increase in its dividend, based on the past five years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Circle Property is already paying out 77% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Is Circle Property worth buying for its dividend? It's never good to see earnings per share shrinking, but at least the dividend payout ratios appear reasonable. We're aware though that if earnings continue to decline, the dividend could be at risk. Bottom line: Circle Property has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Circle Property despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. To help with this, we've discovered 6 warning signs for Circle Property (2 are a bit unpleasant!) that you ought to be aware of before buying the shares.

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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