Read This Before Considering Eagers Automotive Limited (ASX:APE) For Its Upcoming AU$0.25 Dividend

Eagers Automotive Limited (ASX:APE) stock is about to trade ex-dividend in 4 days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Eagers Automotive's shares before the 4th of September in order to be eligible for the dividend, which will be paid on the 18th of September.

The company's next dividend payment will be AU$0.25 per share, on the back of last year when the company paid a total of AU$0.74 to shareholders. Based on the last year's worth of payments, Eagers Automotive has a trailing yield of 3.3% on the current stock price of AU$22.50. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Eagers Automotive has been able to grow its dividends, or if the dividend might be cut.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 88% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 23% of its free cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Check out our latest analysis for Eagers Automotive

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

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. 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 Eagers Automotive's earnings are 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. A high payout ratio of 88% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, Eagers Automotive could be signalling that its future growth prospects are thin.

We'd also point out that Eagers Automotive issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Eagers Automotive has lifted its dividend by approximately 8.7% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Eagers Automotive? It's unfortunate that earnings per share have not grown, and we'd note that Eagers Automotive is paying out lower percentage of its cashflow than its profit, but overall the dividend looks well covered by earnings. To summarise, Eagers Automotive looks okay on this analysis, although it doesn't appear a stand-out opportunity.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. In terms of investment risks, we've identified 3 warning signs with Eagers Automotive and understanding them 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.

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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.