Dividend Investors: Don't Be Too Quick To Buy Amot Investment Ltd (TLV:AMOT) For Its Upcoming Dividend

Amot Investment Ltd (TLV:AMOT) is about to trade ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 16th of March will not receive this dividend, which will be paid on the 25th of March.

Amot Investment's next dividend payment will be ₪0.25 per share, and in the last 12 months, the company paid a total of ₪1.31 per share. Looking at the last 12 months of distributions, Amot Investment has a trailing yield of approximately 5.5% on its current stock price of ₪18.2. 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! As a result, readers should always check whether Amot Investment has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Amot Investment

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Amot Investment distributed an unsustainably high 132% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 77% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while Amot Investment's dividends were not covered by profits, at least they are affordable from a cash perspective. 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 how much of its profit Amot Investment 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Amot Investment's earnings per share have fallen at approximately 13% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

We'd also point out that Amot Investment issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Amot Investment has lifted its dividend by approximately 7.6% 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. Amot Investment is already paying out 132% 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

Should investors buy Amot Investment for the upcoming dividend? Earnings per share have been shrinking in recent times. Worse, Amot Investment's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. Bottom line: Amot Investment has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Amot Investment. For example, we've found 5 warning signs for Amot Investment (1 is concerning!) that deserve your attention before investing in the shares.

If you're in the market for dividend stocks, we recommend checking our list of top 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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