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We Wouldn't Be Too Quick To Buy Challenger Limited (ASX:CGF) Before It Goes Ex-Dividend

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Simply Wall St
·3-min read
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It looks like Challenger Limited (ASX:CGF) is about to go ex-dividend in the next four days. If you purchase the stock on or after the 23rd of February, you won't be eligible to receive this dividend, when it is paid on the 23rd of March.

Challenger's next dividend payment will be AU$0.095 per share, on the back of last year when the company paid a total of AU$0.19 to shareholders. Based on the last year's worth of payments, Challenger stock has a trailing yield of around 2.9% on the current share price of A$6.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Challenger can afford its dividend, and if the dividend could grow.

See our latest analysis for Challenger

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. Challenger 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.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Challenger 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.

Challenger 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. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Challenger has lifted its dividend by approximately 3.5% a year on average.

We update our analysis on Challenger every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

From a dividend perspective, should investors buy or avoid Challenger? It's hard to get past the idea of Challenger paying a dividend despite reporting a loss over the past year - especially when the general trend in its earnings also looks to be negative. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

Although, if you're still interested in Challenger and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 3 warning signs for Challenger (1 shouldn't be ignored) you should be aware of.

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.

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