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Dividend Investors: Don't Be Too Quick To Buy IRESS Limited (ASX:IRE) For Its Upcoming Dividend

Simply Wall St
·4-min read

IRESS Limited (ASX:IRE) is about to trade ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 2nd of September will not receive the dividend, which will be paid on the 25th of September.

IRESS's next dividend payment will be AU$0.16 per share, on the back of last year when the company paid a total of AU$0.46 to shareholders. Calculating the last year's worth of payments shows that IRESS has a trailing yield of 4.3% on the current share price of A$10.82. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether IRESS has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for IRESS

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. IRESS distributed an unsustainably high 131% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out more than three-quarters (83%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while IRESS's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that IRESS's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

We'd also point out that IRESS issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. IRESS has delivered 3.1% dividend growth per year on average over the past 10 years.

The Bottom Line

Has IRESS got what it takes to maintain its dividend payments? Flat earnings per share and a high payout ratio are not what we like to see, although at least it paid out a lower percentage of its free cash flow. It's not that we think IRESS is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of IRESS don't faze you, it's worth being mindful of the risks involved with this business. For example, IRESS has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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@simplywallst.com.