Don't Buy Strategic Education, Inc. (NASDAQ:STRA) For Its Next Dividend Without Doing These Checks

By
Simply Wall St
Published
November 20, 2021
NasdaqGS:STRA
Source: Shutterstock

Readers hoping to buy Strategic Education, Inc. (NASDAQ:STRA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. This means that investors who purchase Strategic Education's shares on or after the 26th of November will not receive the dividend, which will be paid on the 6th of December.

The company's upcoming dividend is US$0.60 a share, following on from the last 12 months, when the company distributed a total of US$2.40 per share to shareholders. Looking at the last 12 months of distributions, Strategic Education has a trailing yield of approximately 4.2% on its current stock price of $57.65. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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 Strategic Education

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Strategic Education distributed an unsustainably high 146% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (59%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Strategic Education 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.

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

historic-dividend
NasdaqGS:STRA Historic Dividend November 21st 2021

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. Strategic Education's earnings per share have fallen at approximately 16% 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. Strategic Education has seen its dividend decline 5.0% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Has Strategic Education got what it takes to maintain its dividend payments? Earnings per share have been in decline, which is not encouraging. What's more, Strategic Education is paying out a majority of its earnings and over half its free cash flow. It's hard to say if the business has the financial resources and time to turn things around without cutting the dividend. It's not that we think Strategic Education is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Strategic Education despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 4 warning signs for Strategic Education you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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