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Don't Race Out To Buy AGL Energy Limited (ASX:AGL) Just Because It's Going Ex-Dividend

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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that AGL Energy Limited (ASX:AGL) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Accordingly, AGL Energy investors that purchase the stock on or after the 25th of August will not receive the dividend, which will be paid on the 29th of September.

The company's next dividend payment will be AU$0.34 per share, on the back of last year when the company paid a total of AU$0.65 to shareholders. Based on the last year's worth of payments, AGL Energy has a trailing yield of 9.1% on the current stock price of A$7.15. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether AGL Energy has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for AGL Energy

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. AGL Energy reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If AGL Energy 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. The company paid out 103% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

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

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Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. AGL Energy was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, AGL Energy has increased its dividend at approximately 1.0% a year on average.

Remember, you can always get a snapshot of AGL Energy's financial health, by checking our visualisation of its financial health, here.

The Bottom Line

Is AGL Energy worth buying for its dividend? It's hard to get used to AGL Energy paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that being said, if you're still considering AGL Energy as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 3 warning signs for AGL Energy that we recommend you consider before investing in the business.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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