Dividend investors: Don’t be too quick to buy CI Resources Limited (ASX:CII) for its upcoming dividend

Looks like CI Resources Limited (ASX:CII) is set to go ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day shareholders must be on the books of the company to receive a dividend. The ex-dividend date is an important date to know because any purchase of shares made on or after this date may mean late settlement which does not appear on the record date. So you can buy shares of CI Resources before March 24 to collect the dividend the company will pay on April 22.

The company’s next dividend payment will be AU$0.02 per share, following last year when the company paid a total of AU$0.02 to shareholders. Looking at the last 12 months of distributions, CI Resources has a rolling yield of around 1.9% on its current stock price of A$1.06. We like to see companies pay out a dividend, but it’s also important to make sure that the laying of the golden eggs will not kill our golden egg hen! We need to see if the dividend is covered by earnings and if it increases.

Check out our latest analysis for CI Resources

If a company pays out more dividends than it has earned, the dividend may become unsustainable – a less than ideal situation. That’s why it’s good to see CI Resources paying out a modest 47% of its earnings. That said, even very profitable companies can sometimes not generate enough cash to pay the dividend, so we should always check if the dividend is covered by cash flow.

Click here to see how much of its profit CI Resources has paid out over the past 12 months.

ASX: Historic CII Dividend March 19, 2022

Have earnings and dividends increased?

Companies with declining profits are riskier for dividend shareholders. If earnings fall enough, the company could be forced to cut its dividend. With that in mind, we are bothered by the 27% annual decline in profits at CI Resources over the past five years. Such a sharp drop casts doubt on the future sustainability of the dividend.

Another key way to gauge a company’s dividend outlook is to measure its historical rate of dividend growth. CI Resources’ dividend payments are actually flat compared to 10 years ago. When profits are falling but dividends are stable, the company usually pays out a higher share of its profits, or puts cash or debt on the balance sheet, which is not ideal.

To summarize

Should investors buy CI Resources for the upcoming dividend? It’s disappointing to see earnings per share fall, and that would normally be enough to put us off most dividend-paying stocks, even if CI Resources pays out less than half of its earnings in dividends. However, it also pays out an uncomfortably high percentage of its cash flow, which makes us wonder just how sustainable the dividend really is. It’s not that we think CI Resources is a bad company, but those characteristics generally don’t lead to outstanding dividend yield.

So if you’re still interested in CI Resources despite its low dividend qualities, you should be well-informed about some of the risks this stock faces. Every business has risks, and we’ve spotted 2 warning signs for CI Resources (1 of which is a little unpleasant!) that you should know about.

If you are looking for good dividend payers, we recommend by consulting our selection of the best dividend-paying stocks.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Warren Dockery

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