It Might Not Be A Great Idea To Buy Argo Investments Limited (ASX:ARG) For Its Next Dividend
Argo Investments Limited (ASX:ARG) is about to trade ex-dividend in the next four 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. This means that investors who purchase Argo Investments’ shares on or after the 16th of August will not receive the dividend, which will be paid on the 13th of September.
The company’s next dividend payment will be AU$0.18 per share, on the back of last year when the company paid a total of AU$0.34 to shareholders. Based on the last year’s worth of payments, Argo Investments stock has a trailing yield of around 3.9% on the current share price of AU$8.90. If you buy this business for its dividend, you should have an idea of whether Argo Investments’s dividend is reliable and sustainable. So we need to investigate whether Argo Investments can afford its dividend, and if the dividend could grow.
See our latest analysis for Argo Investments
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. Argo Investments paid out 103% of its earnings, which is more than we’re comfortable with, unless there are mitigating circumstances.
When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.
Click here to see how much of its profit Argo Investments paid out over the last 12 months.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That’s why it’s not ideal to see Argo Investments’s earnings per share have been shrinking at 4.2% a year over the previous five years.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. Argo Investments has delivered 2.7% dividend growth per year on average over the past 10 years. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Argo Investments 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.
The Bottom Line
From a dividend perspective, should investors buy or avoid Argo Investments? Not only are earnings per share shrinking, but Argo Investments 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 in mind though, if the poor dividend characteristics of Argo Investments don’t faze you, it’s worth being mindful of the risks involved with this business. In terms of investment risks, we’ve identified 1 warning sign with Argo Investments and understanding them should be part of your investment process.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.
