Yahoo Finance Dividend Investors: Don't Be Too Quick To Buy The Reject Shop Limited (ASX:TRS) For Its Upcoming Dividend
Readers hoping to buy The Reject Shop Limited (ASX:TRS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Reject Shop's shares before the 18th of April to receive the dividend, which will be paid on the 3rd of May.
The company's next dividend payment will be AU$0.10 per share, and in the last 12 months, the company paid a total of AU$0.20 per share. Based on the last year's worth of payments, Reject Shop stock has a trailing yield of around 4.4% on the current share price of AU$4.55. If you buy this business for its dividend, you should have an idea of whether Reject Shop's dividend is reliable and sustainable. As a result, readers should always check whether Reject Shop has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for Reject Shop
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. Reject Shop paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Reject Shop generated enough free cash flow to afford its dividend. It paid out 6.0% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Reject Shop's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Reject Shop's earnings per share have dropped 17% a year over the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Reject Shop's dividend payments per share have declined at 6.0% 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.
Final Takeaway
Should investors buy Reject Shop for the upcoming dividend? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Reject Shop's dividend merits.
If you're not too concerned about Reject Shop's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. To help with this, we've discovered 2 warning signs for Reject Shop that you should be aware of before investing in their shares.
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.
