It Might Not Be A Great Idea To Buy ISA Holdings Limited (JSE:ISA) For Its Next Dividend

Readers hoping to buy ISA Holdings Limited (JSE:ISA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Accordingly, ISA Holdings investors that purchase the stock on or after the 17th of July will not receive the dividend, which will be paid on the 22nd of July.

The company's next dividend payment will be R00.112 per share, and in the last 12 months, the company paid a total of R0.19 per share. Looking at the last 12 months of distributions, ISA Holdings has a trailing yield of approximately 9.5% on its current stock price of R01.99. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for ISA Holdings

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. ISA Holdings paid out 100% 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 paid out 109% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

Cash is slightly more important than profit from a dividend perspective, but given ISA Holdings's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that ISA Holdings's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, nine years ago, ISA Holdings has lifted its dividend by approximately 17% a year on average.

To Sum It Up

Is ISA Holdings an attractive dividend stock, or better left on the shelf? Not only are earnings per share flat, but ISA Holdings is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of ISA Holdings.

With that being said, if you're still considering ISA Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 4 warning signs with ISA Holdings (at least 3 which are a bit unpleasant), and understanding these should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com