Don't Buy Libstar Holdings Limited (JSE:LBR) For Its Next Dividend Without Doing These Checks

It looks like Libstar Holdings Limited (JSE:LBR) is about to go ex-dividend in the next three days. 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Libstar Holdings' shares on or after the 4th of April, you won't be eligible to receive the dividend, when it is paid on the 11th of April.

The company's upcoming dividend is R0.22 a share, following on from the last 12 months, when the company distributed a total of R0.22 per share to shareholders. Looking at the last 12 months of distributions, Libstar Holdings has a trailing yield of approximately 4.3% on its current stock price of ZAR5.09. If you buy this business for its dividend, you should have an idea of whether Libstar Holdings's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Libstar 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. Libstar Holdings's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 65% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

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. Libstar Holdings was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the Libstar Holdings dividends are largely the same as they were four years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Remember, you can always get a snapshot of Libstar Holdings's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Has Libstar Holdings got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." It's not that we think Libstar Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Libstar Holdings don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for Libstar Holdings you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.