UK markets open in 5 hours 1 minute

Dividend Investors: Don't Be Too Quick To Buy Dewhurst PLC (LON:DWHT) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Dewhurst PLC (LON:DWHT) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 16th of January in order to be eligible for this dividend, which will be paid on the 26th of February.

Dewhurst's next dividend payment will be UK£0.092 per share, and in the last 12 months, the company paid a total of UK£0.13 per share. Last year's total dividend payments show that Dewhurst has a trailing yield of 1.3% on the current share price of £10. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Dewhurst can afford its dividend, and if the dividend could grow.

View our latest analysis for Dewhurst

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. Dewhurst paid out a comfortable 40% of its profit last year. 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 93% 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 look more closely here.

While Dewhurst'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. Cash is king, as they say, and were Dewhurst to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

AIM:DWHT Historical Dividend Yield, January 12th 2020

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. Dewhurst's earnings per share have fallen at approximately 7.0% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past ten years, Dewhurst has increased its dividend at approximately 7.9% a year on average.

The Bottom Line

Should investors buy Dewhurst for the upcoming dividend? It's disappointing to see earnings per share declining, and this would ordinarily be enough to discourage us from most dividend stocks, even though Dewhurst is paying out less than half its income as dividends. However, it's also paying out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Want to learn more about Dewhurst? Here's a visualisation of its historical rate of revenue and earnings growth.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.