Here's Why We're Wary Of Buying GP Industries' (SGX:G20) For Its Upcoming Dividend

GP Industries Limited (SGX:G20) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day 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 takes at least two business day to settle. Therefore, if you purchase GP Industries' shares on or after the 11th of December, you won't be eligible to receive the dividend, when it is paid on the 19th of December.

The company's next dividend payment will be S$0.01 per share, and in the last 12 months, the company paid a total of S$0.025 per share. Looking at the last 12 months of distributions, GP Industries has a trailing yield of approximately 3.9% on its current stock price of SGD0.64. 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.

Check out our latest analysis for GP Industries

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. GP Industries paid out 109% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. It distributed 27% of its free cash flow as dividends, a comfortable payout level for most companies.

It's good to see that while GP Industries'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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit GP Industries 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. GP Industries's earnings per share have fallen at approximately 14% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. GP Industries's dividend payments per share have declined at 1.8% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

Should investors buy GP Industries for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 109% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. 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 GP Industries and want to know more, you'll find it very useful to know what risks this stock faces. We've identified 3 warning signs with GP Industries (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.