We Wouldn't Be Too Quick To Buy Adcorp Holdings Limited (JSE:ADR) Before It Goes Ex-Dividend

It looks like Adcorp Holdings Limited (JSE:ADR) is about to go ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase Adcorp Holdings' shares on or after the 14th of August, you won't be eligible to receive the dividend, when it is paid on the 19th of August.

The company's next dividend payment will be R00.242 per share, and in the last 12 months, the company paid a total of R0.40 per share. Last year's total dividend payments show that Adcorp Holdings has a trailing yield of 8.3% on the current share price of R04.83. If you buy this business for its dividend, you should have an idea of whether Adcorp Holdings's dividend is reliable and sustainable. As a result, readers should always check whether Adcorp Holdings has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Adcorp Holdings

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. That's why it's good to see Adcorp Holdings paying out a modest 48% of its earnings. 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. Over the last year, it paid out dividends equivalent to 217% of what it generated in free cash flow, a disturbingly high percentage. Unless there were something in the business we're not grasping, this could signal a risk that the dividend may have to be cut in the future.

Adcorp Holdings does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Adcorp Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Adcorp Holdings's ability to maintain its dividend.

Click here to see how much of its profit Adcorp Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Adcorp Holdings's earnings per share have fallen at approximately 20% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Adcorp Holdings's dividend payments per share have declined at 12% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Adcorp Holdings worth buying for its dividend? Adcorp Holdings's earnings per share have fallen noticeably and, although it paid out less than half its profit as dividends last year, it paid out a disconcertingly high percentage of its cashflow, which is not a great combination. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Adcorp Holdings. For instance, we've identified 5 warning signs for Adcorp Holdings (1 is a bit concerning) you should be aware of.

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.