Should You Buy Allied Farmers Limited (NZSE:ALF) For Its Upcoming Dividend?

Allied Farmers Limited (NZSE:ALF) stock is about to trade ex-dividend in four days. Investors can purchase shares before the 11th of December in order to be eligible for this dividend, which will be paid on the 15th of January.

Allied Farmers's next dividend payment will be NZ$0.012 per share, on the back of last year when the company paid a total of NZ$0.02 to shareholders. Based on the last year's worth of payments, Allied Farmers stock has a trailing yield of around 2.9% on the current share price of NZ$0.68. 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.

See our latest analysis for Allied Farmers

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Allied Farmers paid out a comfortable 47% of its profit last year. A useful secondary check can be to evaluate whether Allied Farmers generated enough free cash flow to afford its dividend. Allied Farmers 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 Allied Farmers paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Allied Farmers's earnings have been skyrocketing, up 29% per annum for the past five years.

We'd also point out that Allied Farmers 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Allied Farmers's dividend payments are effectively flat on where they were three years ago.

To Sum It Up

Has Allied Farmers got what it takes to maintain its dividend payments? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

On that note, you'll want to research what risks Allied Farmers is facing. Our analysis shows 4 warning signs for Allied Farmers that we strongly recommend you have a look at before investing in the company.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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