Why It Might Not Make Sense To Buy E. Schnapp & Co. Works Ltd (TLV:SHNP) For Its Upcoming Dividend
Readers hoping to buy E. Schnapp & Co. Works Ltd (TLV:SHNP) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase E. Schnapp Works' shares on or after the 31st of August, you won't be eligible to receive the dividend, when it is paid on the 7th of September.
The company's next dividend payment will be ₪0.1575436 per share, and in the last 12 months, the company paid a total of ₪1.18 per share. Last year's total dividend payments show that E. Schnapp Works has a trailing yield of 6.1% on the current share price of ₪19.38. 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 E. Schnapp Works has been able to grow its dividends, or if the dividend might be cut.
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. E. Schnapp Works distributed an unsustainably high 199% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 40% of the free cash flow it generated, which is a comfortable payout ratio.
It's good to see that while E. Schnapp Works'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. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Check out our latest analysis for E. Schnapp Works
Click here to see how much of its profit E. Schnapp Works paid out over the last 12 months.
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. Readers will understand then, why we're concerned to see E. Schnapp Works's earnings per share have dropped 19% 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.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, E. Schnapp Works has lifted its dividend by approximately 4.4% a year on average. 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. E. Schnapp Works is already paying out 199% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.
Final Takeaway
Should investors buy E. Schnapp Works for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 199% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of E. Schnapp Works.
Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with E. Schnapp Works. To help with this, we've discovered 5 warning signs for E. Schnapp Works (1 makes us a bit uncomfortable!) that you ought to be aware of before buying the 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.