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Gowing Bros. Limited (ASX:GOW) is about to trade ex-dividend in the next four days. This means that investors who purchase shares on or after the 13th of October will not receive the dividend, which will be paid on the 29th of October.
Gowing Bros's next dividend payment will be AU$0.03 per share, and in the last 12 months, the company paid a total of AU$0.06 per share. Last year's total dividend payments show that Gowing Bros has a trailing yield of 3.9% on the current share price of A$1.53. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Gowing Bros paid out 91% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances.
Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.
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. Gowing Bros's earnings per share have fallen at approximately 24% 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. Gowing Bros has seen its dividend decline 14% per annum on average over the past 10 years, which is not great to see. 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
Should investors buy Gowing Bros for the upcoming dividend? Earnings per share are in decline and Gowing Bros is paying out what we feel is an uncomfortably 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. 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. Our analysis shows 5 warning signs for Gowing Bros that we strongly recommend you have a look at before investing in the company.
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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