Don't Race Out To Buy Remgro Limited (JSE:REM) Just Because It's Going Ex-Dividend
Readers hoping to buy Remgro Limited (JSE:REM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date generally occurs two days 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. This means that investors who purchase Remgro's shares on or after the 21st of October will not receive the dividend, which will be paid on the 26th of October.
The company's upcoming dividend is R09.72 a share, following on from the last 12 months, when the company distributed a total of R11.45 per share to shareholders. Looking at the last 12 months of distributions, Remgro has a trailing yield of approximately 5.5% on its current stock price of R0209.96. 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.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Remgro paid out a disturbingly high 230% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business.
Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.
See our latest analysis for Remgro
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Remgro's earnings per share have fallen at approximately 16% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Remgro has delivered 10% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Remgro is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
Final Takeaway
Is Remgro an attractive dividend stock, or better left on the shelf? Not only are earnings per share shrinking, but Remgro is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.
With that being said, if you're still considering Remgro as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 3 warning signs for Remgro that we strongly recommend you have a look at before investing in the company.
Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.
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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.