Here's Why We're Wary Of Buying Adgar Investments and Development's (TLV:ADGR) For Its Upcoming Dividend

Adgar Investments and Development Ltd (TLV:ADGR) stock is about to trade ex-dividend in three days. If you purchase the stock on or after the 6th of December, you won't be eligible to receive this dividend, when it is paid on the 29th of December.

Adgar Investments and Development's upcoming dividend is ₪0.07 a share, following on from the last 12 months, when the company distributed a total of ₪0.28 per share to shareholders. Calculating the last year's worth of payments shows that Adgar Investments and Development has a trailing yield of 5.3% on the current share price of ₪5.259. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Adgar Investments and Development

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Adgar Investments and Development paid out 153% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. 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. Dividends consumed 52% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Adgar Investments and Development fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Adgar Investments and Development 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. Readers will understand then, why we're concerned to see Adgar Investments and Development's earnings per share have dropped 22% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Adgar Investments and Development also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Adgar Investments and Development's dividend payments are broadly unchanged compared to where they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

To Sum It Up

Has Adgar Investments and Development got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. Additionally, Adgar Investments and Development 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 the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Although, if you're still interested in Adgar Investments and Development and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 5 warning signs with Adgar Investments and Development (at least 1 which is a bit unpleasant), and understanding them 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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