It Might Not Be A Great Idea To Buy Tomer Energy Royalties (2012) Ltd (TLV:TOEN) For Its Next Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Tomer Energy Royalties (2012) Ltd (TLV:TOEN) is about to go ex-dividend in just four days. The ex-dividend date generally occurs two days 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. In other words, investors can purchase Tomer Energy Royalties (2012)'s shares before the 29th of September in order to be eligible for the dividend, which will be paid on the 16th of October.

The company's upcoming dividend is US$0.14999 a share, following on from the last 12 months, when the company distributed a total of US$0.40 per share to shareholders. Last year's total dividend payments show that Tomer Energy Royalties (2012) has a trailing yield of 6.4% on the current share price of ₪20.91. 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 check whether the dividend payments are covered, and if earnings are growing.

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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. Tomer Energy Royalties (2012) distributed an unsustainably high 139% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Tomer Energy Royalties (2012) generated enough free cash flow to afford its dividend. Fortunately, it paid out only 38% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Tomer Energy Royalties (2012) 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.

View our latest analysis for Tomer Energy Royalties (2012)

Click here to see how much of its profit Tomer Energy Royalties (2012) paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Tomer Energy Royalties (2012)'s earnings per share have fallen at approximately 21% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last six years, Tomer Energy Royalties (2012) has lifted its dividend by approximately 14% 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. Tomer Energy Royalties (2012) is already paying out 139% 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 Tomer Energy Royalties (2012) an attractive dividend stock, or better left on the shelf? It's never great to see earnings per share declining, especially when a company is paying out 139% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Tomer Energy Royalties (2012)'s cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Tomer Energy Royalties (2012) has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Tomer Energy Royalties (2012) don't faze you, it's worth being mindful of the risks involved with this business. Be aware that Tomer Energy Royalties (2012) is showing 3 warning signs in our investment analysis, and 2 of those are significant...

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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.