Do These 3 Checks Before Buying 2 Cheap Cars Group Limited (NZSE:2CC) For Its Upcoming Dividend

2 Cheap Cars Group Limited (NZSE:2CC) is about to trade ex-dividend in the next two days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade can take two business days or more to settle. Thus, you can purchase 2 Cheap Cars Group's shares before the 20th of November in order to receive the dividend, which the company will pay on the 5th of December.

The company's next dividend payment will be NZ$0.0182352 per share. Last year, in total, the company distributed NZ$0.059 to shareholders. Calculating the last year's worth of payments shows that 2 Cheap Cars Group has a trailing yield of 9.7% on the current share price of NZ$0.61. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether 2 Cheap Cars Group has been able to grow its dividends, or if the dividend might be cut.

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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. 2 Cheap Cars Group paid out 114% 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. 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. Fortunately, it paid out only 33% 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 2 Cheap Cars Group 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. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

See our latest analysis for 2 Cheap Cars Group

Click here to see how much of its profit 2 Cheap Cars Group paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. 2 Cheap Cars Group's earnings per share have fallen at approximately 27% 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. 2 Cheap Cars Group has delivered an average of 17% per year annual increase in its dividend, based on the past four years of dividend payments. 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. 2 Cheap Cars Group is already paying out 114% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid 2 Cheap Cars Group? It's not a great combination to see a company with earnings in decline and paying out 114% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in 2 Cheap Cars Group's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: 2 Cheap Cars Group 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 2 Cheap Cars Group don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 3 warning signs for 2 Cheap Cars Group you should be aware of.

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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.