Dividend Investors: Don't Be Too Quick To Buy Turners Automotive Group Limited (NZSE:TRA) For Its Upcoming 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 Turners Automotive Group Limited (NZSE:TRA) is about to go ex-dividend in just 4 days. The ex-dividend date occurs one day 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 as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Turners Automotive Group's shares on or after the 9th of January will not receive the dividend, which will be paid on the 29th of January.

The company's upcoming dividend is NZ$0.0823529 a share, following on from the last 12 months, when the company distributed a total of NZ$0.25 per share to shareholders. Based on the last year's worth of payments, Turners Automotive Group has a trailing yield of 4.6% on the current stock price of NZ$5.57. 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 investigate whether Turners Automotive Group can afford its dividend, and if the dividend could grow.

View our latest analysis for Turners Automotive Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Turners Automotive Group paid out more than half (72%) of its earnings last year, which is a regular payout ratio for most companies. 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. Turners Automotive Group paid out more free cash flow than it generated - 115%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Turners Automotive Group paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Turners Automotive Group to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Turners Automotive Group earnings per share are up 7.6% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Turners Automotive Group has lifted its dividend by approximately 18% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Turners Automotive Group for the upcoming dividend? Earnings per share have grown somewhat, although Turners Automotive Group paid out over half its profits and the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Turners Automotive Group.

With that being said, if you're still considering Turners Automotive Group as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 2 warning signs for Turners Automotive Group that we strongly recommend you have a look at before investing in the company.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.