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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Gowing Bros. Limited (ASX:GOW) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 8th of April, you won't be eligible to receive this dividend, when it is paid on the 23rd of April.
Gowing Bros's next dividend payment will be AU$0.04 per share. Last year, in total, the company distributed AU$0.06 to shareholders. Calculating the last year's worth of payments shows that Gowing Bros has a trailing yield of 2.9% on the current share price of A$2.1. 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 Gowing Bros can afford its dividend, and if the dividend could grow.
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. Gowing Bros paid out 53% of its earnings to investors last year, a normal payout level for most businesses.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Readers will understand then, why we're concerned to see Gowing Bros's earnings per share have dropped 20% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Gowing Bros's dividend payments per share have declined at 4.1% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
The Bottom Line
From a dividend perspective, should investors buy or avoid Gowing Bros? We're not overly enthused to see Gowing Bros's earnings in retreat at the same time as the company is paying out more than half of its earnings as dividends to shareholders. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.
With that being said, if you're still considering Gowing Bros as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 4 warning signs for Gowing Bros (of which 2 shouldn't be ignored!) you should know about.
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.
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. 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.
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