Yahoo Finance Don't Race Out To Buy Costa Group Holdings Limited (ASX:CGC) Just Because It's Going Ex-Dividend
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 Costa Group Holdings Limited (ASX:CGC) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. 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. Accordingly, Costa Group Holdings investors that purchase the stock on or after the 8th of March will not receive the dividend, which will be paid on the 6th of April.
The company's next dividend payment will be AU$0.05 per share, on the back of last year when the company paid a total of AU$0.09 to shareholders. Last year's total dividend payments show that Costa Group Holdings has a trailing yield of 3.6% on the current share price of A$2.52. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.
See our latest analysis for Costa Group Holdings
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. Costa Group Holdings paid out 124% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether Costa Group Holdings generated enough free cash flow to afford its dividend. Costa Group Holdings paid out more free cash flow than it generated - 132%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.
Cash is slightly more important than profit from a dividend perspective, but given Costa Group Holdings's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.
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. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Costa Group Holdings's 27% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Costa Group Holdings also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Costa Group Holdings has delivered 6.0% dividend growth per year on average over the past seven years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Costa Group Holdings is already paying out 124% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
The Bottom Line
From a dividend perspective, should investors buy or avoid Costa Group Holdings? Not only are earnings per share declining, but Costa Group Holdings is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
With that being said, if you're still considering Costa Group Holdings as an investment, you'll find it beneficial to know what risks this stock is facing. To help with this, we've discovered 2 warning signs for Costa Group Holdings that you should be aware of before investing in their shares.
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.
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