Don't Race Out To Buy Nictus Limited (JSE:NCS) Just Because It's Going Ex-Dividend

Nictus Limited (JSE:NCS) stock is about to trade ex-dividend in three 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 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. Meaning, you will need to purchase Nictus' shares before the 20th of July to receive the dividend, which will be paid on the 25th of July.

The company's next dividend payment will be R0.03 per share. Last year, in total, the company distributed R0.03 to shareholders. Last year's total dividend payments show that Nictus has a trailing yield of 4.3% on the current share price of ZAR0.69. If you buy this business for its dividend, you should have an idea of whether Nictus's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Nictus

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Nictus paying out a modest 32% of its earnings. A useful secondary check can be to evaluate whether Nictus generated enough free cash flow to afford its dividend. It paid out an unsustainably high 251% of its free cash flow as dividends over the past 12 months, which is worrying. 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.

Nictus 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.

Nictus paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Nictus's ability to maintain its dividend.

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Nictus's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Nictus has seen its dividend decline 14% per annum on average over the past 10 years, which is not great to see.

The Bottom Line

Has Nictus got what it takes to maintain its dividend payments? It's disappointing to see earnings per share have fallen slightly, even though Nictus is paying out less than half its income as dividends. It's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. Bottom line: Nictus has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Nictus don't faze you, it's worth being mindful of the risks involved with this business. For example, Nictus has 5 warning signs (and 2 which are a bit concerning) we think you should know about.

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.