It Might Not Be A Great Idea To Buy Averbuch Formica Center Ltd. (TLV:AVER) For Its Next Dividend

It looks like Averbuch Formica Center Ltd. (TLV:AVER) is about to go ex-dividend in the next three days. You will need to purchase shares before the 27th of December to receive the dividend, which will be paid on the 5th of January.

The upcoming dividend for Averbuch Formica Center will put a total of ₪0.48 per share in shareholders' pockets, up from last year's total dividends of ₪0.36. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Averbuch Formica Center can afford its dividend, and if the dividend could grow.

See our latest analysis for Averbuch Formica Center

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. Averbuch Formica Center lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Averbuch Formica Center didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Averbuch Formica Center paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Averbuch Formica Center was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last seven years, Averbuch Formica Center has lifted its dividend by approximately 2.6% a year on average.

Remember, you can always get a snapshot of Averbuch Formica Center's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

Should investors buy Averbuch Formica Center for the upcoming dividend? It's hard to get used to Averbuch Formica Center paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Averbuch Formica Center.

With that being said, if you're still considering Averbuch Formica Center as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 4 warning signs with Averbuch Formica Center (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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