Here's Why We're Wary Of Buying Gooch & Housego's (LON:GHH) For Its Upcoming Dividend

Gooch & Housego PLC (LON:GHH) is about to trade ex-dividend in the next 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. Accordingly, Gooch & Housego investors that purchase the stock on or after the 20th of June will not receive the dividend, which will be paid on the 26th of July.

The company's next dividend payment will be UK£0.049 per share, and in the last 12 months, the company paid a total of UK£0.13 per share. Last year's total dividend payments show that Gooch & Housego has a trailing yield of 2.5% on the current share price of UK£5.30. If you buy this business for its dividend, you should have an idea of whether Gooch & Housego's dividend is reliable and sustainable. As a result, readers should always check whether Gooch & Housego has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Gooch & Housego

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Gooch & Housego paid out a disturbingly high 259% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Gooch & Housego generated enough free cash flow to afford its dividend. Over the last year it paid out 51% of its free cash flow as dividends, within the usual range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Gooch & Housego fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. With that in mind, we're discomforted by Gooch & Housego's 30% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Gooch & Housego has lifted its dividend by approximately 7.5% a year on average. 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. Gooch & Housego is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Is Gooch & Housego worth buying for its dividend? Earnings per share have been in decline, which is not encouraging. Additionally, Gooch & Housego is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. It's not that we think Gooch & Housego is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Gooch & Housego and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 3 warning signs for Gooch & Housego and you should be aware of these before buying any shares.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com