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Here's Why We're Wary Of Buying Dixons Carphone plc's (LON:DC.) For Its Upcoming Dividend

Simply Wall St

Readers hoping to buy Dixons Carphone plc (LON:DC.) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 5th of September, you won't be eligible to receive this dividend, when it is paid on the 27th of September.

Dixons Carphone's next dividend payment will be UK£0.045 per share, on the back of last year when the company paid a total of UK£0.068 to shareholders. Based on the last year's worth of payments, Dixons Carphone has a trailing yield of 6.3% on the current stock price of £1.074. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Dixons Carphone

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Dixons Carphone paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Dixons Carphone didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. It paid out 97% 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.

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

LSE:DC. Historical Dividend Yield, September 2nd 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Dixons Carphone reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 9 years, Dixons Carphone has lifted its dividend by approximately 4.6% a year on average.

We update our analysis on Dixons Carphone every 24 hours, so you can always get the latest insights on its financial health, here.

To Sum It Up

Has Dixons Carphone got what it takes to maintain its dividend payments? We're a bit uncomfortable with it paying a dividend while being loss-making, especially given that the dividend was not well covered by free cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Dixons Carphone.

Wondering what the future holds for Dixons Carphone? See what the 11 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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. Thank you for reading.